After a lull this summer, apartment investors returned to the table, closing a tremendous volume of deals in October alone.
Apartment experts have worried for some time that the high prices investors pay for apartments and the large number of transactions are unsustainable. But new buyers continue to be drawn to the multifamily space, attracted by the fundamental strength of the apartment business and high yields, at least compared to other investment options.
“There is still a lot of capital going into apartments,” says Jim Costello, senior vice president for data firm Real Capital Analytics (RCA)..
Rents are growing quickly at apartment communities across the country and occupancy rates are still high, despite high levels of new construction. Large numbers of young people and low homeownership rates are helping to fill these new apartments. These strong fundamentals are helping attract investors to big on apartments.
"Some will credit recent dynamics to structural, longer-term demographic and homeownership shifts in the U.S., while others interpret it as leading indicators of a peaking sector," according to the Third Quarter Investment Outlook from Jones Lang LaSalle.
Investors traded $19.6 billion in apartment properties in October, according to RCA. That’s a huge number, up 65 percent from the year before. A big part of the volume of apartment sales in October was the $7.6-billion sale of Home Properties of Lone Star Funds, a private equity firm. The deal closed in October, and accounted for 40 percent of the deal volume in that month. Without that sale, the volume of transactions this October would have been slightly higher than the year before.
More multi-billion-dollar deals are on the way to fill out the volume of future months. Blackstone recently announced its plan to buy the 5,000 apartments at Stuyvesant Town in New York City. Equity Residential, one of the largest apartment real estate investment trusts, also announced its plans to sell several property in November.
That’s a big bump up for the month before. After rising steadily through the spring and summer, the volume of apartment trades closed in September fell 7 percent compared to the year before. “We got into a summer slowdown,” says Costello. Global economic problems and a string a weak job reports in the U.S. worried investors. The Federal Reserve delayed raising its benchmark interest rates. Much of that uncertainty has evaporated with the autumn, with less bad news out of China and better news from the U.S. economy.
Sale prices for apartment properties also continued to rise relative to the income produced by the properties. Cap rates, which fall as prices rise, averaged 5.8 percent in October. That’s down from 6.0 percent the year before, according to RCA. Cap rates represent the income produced by a property as a percentage of the sale price. High-rise and mid-rise properties have held onto the high prices relative to income they commanded last year. Cap rates averaged 5.1 percent for these properties in October, the same as the year before. Garden apartments now earn higher sale prices, with average cap rates of 6.0 percent in October, compared to 6.2 percent the year before.