Aimco's Palazzo Portfolio acquisition was one of 2017's biggest. Palazzo West at the Grove, pictured, is one of Aimco's newest additions in Los Angeles.
Aimco's Palazzo Portfolio acquisition was one of 2017's biggest. Palazzo West at the Grove, pictured, is one of Aimco's newest additions in Los Angeles.

What do the apartment transaction trends of the past 12 months tell us about the next 12, even as congressionally driven tax overhaul poses new challenges and a new pall of uncertainty around multifamily mergers and acquisitions go-forward strategy?

In the third quarter of 2017, apartment transaction volume was up 5% year over year (YOY), at $39.9 billion, according to the U.S. Capital Trends Apartment Report from real estate data firm Real Capital Analytics (RCA). But that figure masks the recent direction of things. Actually, third-quarter single-asset deal volume fell 5% year over year, including a 16% YOY drop in September.

If not for a single portfolio transaction—the largest deal of the year—overall multifamily deal volume would’ve fallen 3% YOY in the third quarter of last year. The Greystar Growth and Income Fund, LP, which is led by Greystar Real Estate Partners and its initial founding capital partners, APG Asset Management NV, GIC, and Ivanhoé Cambridge, completed the acquisition of Monogram Residential Trust in September. The portfolio that Greystar—the nation’s largest apartment operator—acquired included investments in 48 multifamily communities in 10 states comprising 13,438 apartments. The total portfolio transaction value was approximately $4.4 billion, including Monogram’s joint venture with Dutch fund manager PGGM and debt assumed or refinanced.

In a given year, says Jim Costello, senior vice president at RCA, 23% of all deal volume is tied up in portfolios or entity-level transactions. Through mid-November, those types of deals made up about 23% of all deal volume, he adds. Portfolio transactions have ebbed and flowed recently, from a high of 32% of all deals in the fourth quarter of 2015 to a low of 16% in the third quarter of 2016.

Now, it appears a return to the norm has taken hold. Large investors, Costello says, are looking toward real estate to provide a yield that can’t be matched by other asset classes. “Buying a portfolio of assets is a way of deploying billions of dollars quickly,” he says. “That activity cooled in 2016, but it’s increased a little bit in 2017 and is actually the force driving total market volume to be positive at this point.”

Single-asset sales are down, according to Costello, because buyers and sellers are “further apart” than they have been in the past. “The owners of existing buildings have a certain set of expectations on the prices they should receive,” he says. “Potential buyers still like the yield characteristics of the apartment market but they’re not as willing to step up to lower and lower cap rates as they [were] just a year or so ago.

“A high-quality asset can still transact,” he adds. “It’s just that the owners, if they really want to bring it to market, may not find the depth in the buyer pool that they had just a short while ago.”

According to JLL, high-rise transaction activity was down 46.7% YOY in the third quarter of 2017, while garden-style assets constituted 69.6% of transaction activity through the third quarter.

Jeff Erxleben, executive vice president/regional managing director for NorthMarq Capital, says lenders have gotten more creative in recent years when it comes to multifamily deals. “It’s not just a standard bullet loan that you have to fit into in order to make your acquisition work,” he says. “It’s really that they’re able to tailor to what the acquisition is to get it done. It’s a big [reason] why the big deals are taking off.”

Erxleben expects that trend to continue, adding that the major lending sources, Fannie Mae and Freddie Mac, will have a major presence in the market moving forward. “Even if they get a little smaller [in 2018], it’s still a huge portion of the market, and I don’t see that creativity being put back into a box from the standpoint of there’s still so much liquidity out there that they can tackle these major deals.”

Buyers are still on the hunt for value-add deals, though Erxleben questions just how many there are left to acquire.

For Trevor Fase, managing director at Walker & Dunlop, 2017 kept him busy working with clients refinancing properties, including a $267 million refinance of four properties for G.H. Palmer Associates. The portfolio totaled 1,359 units in California. G.H. Palmer, Fase says, was able to reduce its interest rate by more than 200 basis points by refinancing, more than enough to cover the prepayment penalty on the existing loans.

“More borrowers are taking advantage of [Fannie Mae and Freddie Mac] green programs and low interest rates,” Fase says. “While loans [from eight to 10 years ago] might have a prepayment penalty attached to them, the better financing and the interest-only payments on those loans on the leverage we were offering have been a significant inducement to people refinancing properties early and recasting their new loans out another seven to 10 years.”

Multifamily transaction volume in 2016 totaled $158.4 billion. With numbers for 2017 still being assessed in December, multifamily transaction volume last year stood at $125 billion in mid-November and was on pace for $145 billion in 2017, according to RCA.

In markets where mid-rise and high-rise assets are most prevalent, deal volume fell sharply through the first three quarters of 2017. Within the six biggest metros, deal volume was down 18% year to date through three quarters, according to RCA. By contrast, in the nonmajor metros, where garden apartments dominate the inventory, deal volume was down only 3% through the third quarter. “The combination of higher average cap rates and ongoing cap-rate compression in markets dominated by the garden apartment sector are likely driving this least–worse performance on deal volume,” RCA says.

Looking ahead, JLL, in a third-quarter research report, said it expects entity-level and debt activities to make up a larger share of real estate investment in the remainder of the cycle.

“Higher yield–seeking sources of capital will remain focused on value-add strategies, while institutional groups will remain on the defensive with a focus on those assets in proven long-term submarkets and with stable income outlooks, favoring areas such as multifamily and urban office as opposed to retail,” the JLL report stated. “As we move to year’s end with full-year volumes down as expected, we expect these shifting market dynamics to apply further downward pressure on volumes in 2018.”

We’ll see how rising interest rates, fewer value-add opportunities, and major institutional capital impact the 2018 landscape.