The acquisition market has been gathering steam in the second quarter, with cap rates declining nationally and the gap between buyers and sellers narrowing.

For the last two years, the typical sellers seemed to be only those who had to sell. And the perception that rents and values will escalate two years from now has kept many owners who bought at the height of the market from listing their properties.

But among longer-term holders, there’s been a shift in attitudes in the past 90 days. The bidding on high-quality assets has become so frenzied that owners are beginning to ask themselves if now really is such a bad time to sell.

On the Market
Consider Camden Property Trust, which owns more than 60,000 units nationally. The company hasn’t acquired any communities in the past six months, but not for a lack of effort. “We’ve been in a lot of bidding wars; we’ve just gotten a little uncomfortable with where some of the pricing has gone,” says Dennis Steen, CFO of the Houston-based REIT. “There’s a lot of capital out there chasing these assets, so we’re also wondering if we should put anything up for sale.”

Indeed, some of the nation’s largest owners are now beginning to reconsider their hold strategies relative to the recession’s timeline. Brokers are reporting a jump in listings and more requests for Broker Opinions of Value, and lenders are seeing more acquisition loan requests in the last few months.

“One of our clients, a big national owner, was so shocked at where some deals are trading that they went back to their existing portfolio and figured if they can get a sub-6 percent cap rate, they ought to sell now, too,” says Don King, national production manager for agency lending at Boston-based CWCapital.

Of course, not all markets are created equally. Stable, high-barrier markets such as Washington D.C. are getting a lot of attention, while investors bypass cities that are still struggling with oversupply.

In May, UDR purchased the Portico at Silver Spring Metro, a 151-unit transit-oriented high-rise, for $43 million, the first buy in its joint venture with Kuwait Finance House. The transaction for the Silver Spring, Md., asset had a cap rate of 5.4 percent. “What you’re seeing is people chasing the higher end product right now, that’s where you’ve seen some pretty strong prices,” says Mark Wallis, a senior executive vice president at Denver-based UDR.

Trending Tales 
Cap rates on mid-rise and high-rise apartments fell by 90 bps, to 5.3 percent, from April 2009 to April 2010. And May and June only furthered that trend.

There have already been two deals closed in June at sub-6 percent cap rates, including a $4.4 million deal for the 112-unit River Haven, a garden apartment community in Raleigh, N.C., and a $16 million purchase of the 88-unit Oak Grove Apartments in Novato, Calif.

May saw at least seven multifamily trades that registered sub-6 percent cap rates, including the $54.4 million purchase of the 304-unit Riverside Station in Woodbridge, Va.; the $45.5 million acquisition of the 358-unit Gramercy Square in Charlotte, N.C.; and a $43.5 million purchase of Biscayne Bay, a 512-unit garden community in Chandler, Ariz.

“For quality assets, there’s intense competition, and cap rates are declining because of these assets,” says Ben Thypin, a senior market analyst at New York-based market-research firm Real Capital Analytics. “Owners see this cap rate environment, and the financing environment with Fannie and Freddie, and think that maybe this is a good time to get out and capture some of this unique pricing environment.”

Check out the other segments in this series below.
Part 2: Smaller REITs See Transactions Pick Up by Les Shaver
Part 3: Multifamily Dispositions Move to By-the-Pound Pricing by Chris Wood