Apartment deal volume fell by 35% year over year (YOY), on sales of $26.0 billion, in the first quarter of 2017, according to the latest U.S. Capital Trends report by RCA Capital Analytics. This drop is the sharpest YOY decline this quarter across all property market sectors. As of this report, the multifamily market is the nation’s No. 2 real estate investment market, behind the office sector.
Despite this drop in volume, apartment investment activity is still ahead of the $17.0 billion average pace set in the first quarters of 2001 through 2016, and prices remain tight.
Across all asset types, asset-level deal volume remained the strongest transaction sector in the apartment market, with a 15% drop in deal volume YOY, on sales of $21.8 billion. Mid-/high-rise activity accounted for much of this decline, with a 36% drop YOY on individual-transaction sales of $5.8 billion, while garden-style apartment sales fell only 3% YOY.
Activity for the quarter was weakest in portfolio- and entity-level transactions. These megadeals fell 71% YOY, on sales of $4.2 billion, following $14.7 billion in megadeal activity in the first quarter of 2016. That was the second-highest recorded megadeal transaction volume in the report’s history, and this past quarter’s sharp drop back to about an average level of deal volume is not unusual. (The usual average first-quarter pace of megadeal transactions is $5.4 billion.)
In the "Big Six" major metros (Los Angeles; San Francisco; New York; Boston; Washington, D.C.; and Seattle), apartment deal volume fell by 40% YOY, on sales of $7.5 billion. In all other markets, deal volume fell 33% YOY, on sales of $18.5 billion.
In July 2016, the 10-year U.S. Treasury rate (UST) was 426 basis points below the 5.8% cap rate. Eight months later, in March 2017, cap rates fell to a record low of 5.4%, or 290 basis points higher than the current 10-year UST.
Given this rise in the 10-year UST and the concurrent cap-rate decline, RCA concludes that investors aren't currently attracted to megadeal structures, as the apartment sector isn't currently an attractive option for large amounts of capital investment. This decline is clearest in the garden apartment sector, where smaller properties are frequently assembled into large portfolios. Garden-style megadeal volume fell by 76%, on sales of $2.8 billion, last quarter, while overall garden-style deal volume fell 34% YOY, on sales of $18.8 billion.
Despite this trend, RCA considers this cap-rate spread to be another example of movement back to historical averages. Over the long term, the cap-rate spread—or the difference between the 10-year Treasury rate and the cap rate—has averaged 322 basis points.
Private investors were net buyers in the first quarter of 2017, acquiring $1.5 billion more in assets than they sold. Institutional/fund managers, meanwhile, were net sellers, buying assets priced at $4.7 billion and selling $6.9 billion worth. Cross-border investors were net buyers, acquiring $820 million more than they sold.