Central Business District (CBD) apartment investments have comprised an increasing share of the transaction market. They’ve also had higher cap-rate compression than their suburban counterparts. The question is, if supply keeps flowing or the overall apartment market slows down, will CBDs continue to attract investors?
The share of CBD transactions has gradually increased since the end of the recession, from 13 percent in the fourth quarter of 2009 to nearly 20 percent in the second quarter of 2013, according to CoStar data.
In addition, the spread between suburban and CBD transaction cap rates has widened in the last six quarters, moving from about 60 basis points (bps) at the end of 2011 to roughly 100 bps by mid-2013. Since their peaks, CBD cap rates compressed by more than 110 bps, while suburban cap rates decreased about 85 bps.
The CBD apartment investment appeal is justified by growing demand expectations, driven by the Millennial generation, which favors diverse, walkable, urban spaces. That said, CBD apartment investments face the uncertainty that comes with a maturing multifamily market.
One potential risk is the growing amount of new supply. CBD units represented about 32 percent of apartment deliveries since the beginning of 2012, according to CoStar data. As of mid-2013, that share had jumped to 43 percent of units under construction and more than 45 percent of proposed developments.
The proposed project data combine buildings at different stages, some of which may be delayed. Still, the data suggest sustained construction activity in central urban locations.
Another risk is deceleration in CBD investment activity, which can affect cap rates and values. However, the most recent transaction data are still strong. CBD volumes grew by more than 30 percent between 2011 and 2012 and, based on recent data, were more than 80 percent higher in the first half of 2013 than in the same period in 2012.
The early 2013 data, however, are somewhat irregular. The first quarter volumes are unusually high when compared to previous years because of the Archstone-AvalonBay-Equity Residential transaction. That made the second quarter volumes unusually low compared to those recorded in the first quarter.
All things considered, CBD apartment investment trends are still on the ascent. In total, third quarter 2013 year-to-date transactions already represent more than 85 percent of those completed in 2012. Transactions may get volatile in the long term, due to interest rate changes or capital reallocation. But going into 2014, CBD apartments seem to be on track to account again for a growing share of multifamily sales.
Luis Mejia is director of research, multifamily, for PPR, a CoStar Company, and can be reached at [email protected].
