Apartment Capital Market Update, Q1 2019

National Cap Rate Trends


National Apartment Market: Cap Rate Trends, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


The chart above shows multifamily cap rate trends for both the mean cap rate on a quarterly basis (the dark blue line) and the 12-month rolling average cap rate (the orange line), which smooths outliers over a 12 month period. It includes quarterly trends for the last five years, from the first quarter of 2014 to the first quarter of 2019, along with the 10-year average cap rate since 2009 of just over 6.3% (depicted by the light blue dotted line).

This overall declining trend in apartment cap rates has defied the Fed’s increasing of fed funds rate over the last two years. That said, while the 12-month rolling cap rate fell 10 basis points to 5.4% in the quarter (the lowest ever), the average cap rate increased to 5.4% from a low of 5.3% last quarter.  It is important to mention, however, that data is subject to selection bias. Cap rates are calculated based on properties that traded in the quarter and, very often, sales are heavily weighted by higher-end properties in high-priced markets.


Average Price per Unit


National Apartment Market: Average Price per Unit, 2014 – 2019 

Source: REIS, Real Estate Solutions by Moody’s Analytics


The top 10 metros are New York City, Los Angeles, San Francisco, Phoenix, Suburban Virginia, Seattle, Chicago, Orlando, Atlanta, and Denver. As seen in the chart above, average prices declined in the quarter in both the top 10 metros and top 50 group. This is consistent with the increase in the apartment cap rate. You can see that there is some seasonality in the data in that the first quarter has consistently shown a dip in average price. There has also been a consistent increase in cap rates in the first quarter as well. This is indicative of the lower volume of transactions in the first quarter – particularly in New York and Los Angeles. In New York City, volume fell to $2 billion from $3.8 billion in the fourth quarter of 2018, while in Los Angeles, volume fell to $1.2 billion from $1.9 billion at the end of 2018. The average price per unit actually increased in New York to more than $500 thousand from an average of $400,000 last quarter. Two high-profile trades, the Corner on West 72nd Street and Stonehenge 86 on East 86th Street, weighed on the increase in the average price in New York. Nevertheless, New York City’s overall drop in volume means that it did not weigh as heavily on the averages shown here, which is one reason why the average price declined. One could argue that the decline in the first quarter in both lines is somewhat of a normalization in prices – almost a relief as the average price clearly spiked in the second half of 2018.

The gap between the average price for the top 10 metros vs. the top 50 metros (the distance between the two lines) has been generally consistent over the last five years, but it did widen just a bit over the last five quarters to 21% from 19%.  The only other metros that saw an increase in their average price per unit in the quarter were Boston, Seattle, Austin, Suburban Maryland, and Houston. Some of these metros have also seen some of the highest multifamily rent growth over the last few quarters as well.  Rent growth in the apartment market was 0.5% in the first quarter of 2019, weaker than the previous 8 quarters. Together the slight increase in the apartment cap rate, the drop in the average sales price per unit, and the deceleration in rent growth demonstrates that the apartment market is adjusting a bit after a sharp run-up in values in 2018. This is a healthy sign, as many worried that the market was getting overheated.


Sales Volume


National Apartment Market: Indexed Transaction Volume, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


The top 10 metros accounted for 53% of the total volume for the top 50 this quarter. Notice how cyclical this market is: the highest quarter of activity every year is the fourth quarter, and the lowest is the first quarter – and this year’s first quarter was consistent with this trend as volume fell 30%. For the top 50 metros, the transaction volume was lower than the first quarter of 2018 and slightly higher than in 2017.

The chart above confirms that things slowed down a bit in the strong multifamily market. This could be due, however, to the cyclical nature of the investment sales market. Many investors may be a bit tentative about overall market conditions due to the trade war talks. Additionally, in California and New York City, politicians are in ongoing discussions about rent regulations, which has given investors a reason to take a ‘wait and see’ approach for a while. This could affect sales volume, cap rates, and prices over the next few quarters.

Analysis by Barbara Byrne Denham. Denham is a Senior Economist in the research and economics department at REIS, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.


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