Apartment Capital Market Update, Q2 2019

National Cap Rate Trends


National Apartment Market: Cap Rate Trends, 2014 Q2 – 2019 Q2

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


The chart above illustrates multifamily cap rate trends for both the mean cap rate on a quarterly basis (the green line) and the 12-month rolling average cap rate (the blue line), which smooths outliers over a 12 month period.  We show quarterly trends for the last five years, from the second quarter of 2014 to the second quarter of 2019, along with the 10-year average cap rate since 2009 of just over 6.3% (the dotted line).

The overall declining trend in apartment cap rates has defied the Fed’s increasing of the fed funds rate over the last two years. That said, the average cap rate of 5.4% is 10 basis points lower than last quarter’s average of 5.5%. It is still higher, however, than it was at the end of 2018 when it hit bottom at 5.3%. The 12-month rolling cap rate also held steady at 5.4%. One might expect that cap rates would have dropped this quarter as interest rates have fallen, but this was only partially the case. Instead, apartment cap rates seem to have normalized after declining in the face of rising interest rates.  This leveling off these last two quarters is a healthy sign as the recent cap rate decline over the prior two years had looked uncomfortably low. Still, it is important to note the data is subject to selection bias in that cap rates are calculated based on properties that traded in the quarter and very often, sales are sometimes heavily weighted by higher-end properties in high-priced markets.


Average Price per Unit


National Apartment Market: Average Price per Unit, 2013 – 2019 Q2

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


In the chart above we show the average price per unit for the top 50 metros as well as the top 10. The top 10 metros are New York City, Los Angeles, San Francisco, Phoenix, Suburban Virginia, Seattle, Chicago, Orlando, Atlanta, and Denver. Average prices slightly increased in both the top 10 metros and the top 50 metros. This is consistent with the 10 basis point decline in the cap rate. The average price in the top 50 metros increased less than $6,000 per unit or 3% while the average price in the top 10 metros increased $3,000 per unit or 1%. This suggests that prices are converging a bit between the top 10 and subsequent 40.

Very often the statistics are heavily weighted by property sales in New York City and Los Angeles, and this quarter was no exception. The two markets accounted for 21% of the total sales volume, which is consistent with prior quarters. In New York City, volume climbed to $2.4 billion from $2 billion in the first quarter, while in Los Angeles, volume increased to $2.0 billion from $1.3 billion last quarter. The average price per unit declined a bit in New York to $410 thousand per unit from more than $500 thousand last quarter. There were fewer high-profile trades in New York City this quarter compared to last quarter. This may be why the average price declined. The average price increased in Los Angeles to $380,000 per unit. A few significant trades pushed this average up including the Glendon in Westwood Village that sold for more than a $1 million per unit.

Other metros that saw a noteworthy increase in their average price per unit in the quarter were Austin, Washington DC, Fairfield County, Kansas City, San Diego, Orange County, Indianapolis, and Suburban Maryland. 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 1.3% in the second quarter of 2019, stronger than the previous 2 quarters, yet consistent with rent growth a year ago. Together, the very small decrease in the apartment cap rate along with the equally low increase in the average sales price per unit, plus healthy rent growth shows that the apartment market remains a preferred asset. While all of these measures had decelerated quite a bit in the first quarter, or stayed flat, all measures improved in the second quarter. Many still worry that the market is getting overheated.


Sales Volume


National Apartment Market: Indexed Transaction Volume, 2013 – 2019 Q2

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


The top 10 metros in this case accounted for 56% of the total volume for the top 50. Notice how cyclical this market is: the highest quarter of activity every year is generally the fourth quarter, and the lowest is the first quarter. In the second quarter, volume rose 8% in the top 50 metros after falling 30% in the first quarter. For the top 10 metros, volume rose 10% in the second quarter after falling 25% in the first quarter. This transaction volume was higher than the second quarter of 2018 when volume was at a two-year low.

This chart confirms that this market is cyclical but still of interest to many investors, even in New York City where recent rent regulations were passed (although most of New York City’s apartment transactions were likely closed or negotiated before the regulations passed in June). Volume in New York should slow in the next few quarters as investors figure what the new rules mean. In California, volume could also slow if rent regulation discussions progress prompting investors to take a wait and see approach for a while. This could not only affect sales volume but 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.

Copyright © 2019 Reis, Inc.


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