Apartment Capital Market Update, Q3 2019

National Cap Rate Trends

 

National Apartment Market: Cap Rate Trends, 2014 Q3 – 2019 Q3

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 – which smooths outliers over a 12-month period (this is blue line). We show quarterly trends for the last five years, from the third quarter of 2014 to the third quarter of 2019 along with the 10-year average cap rate since 2009 of 6.3% (the dotted line). The average apartment cap rate of 5.2% is an all-time low and is 30 basis points lower than last quarter’s average of 5.5%. It’s also a full 110 basis points below the ten-year average of 6.3%.

The 12-month rolling cap rate held steady at 5.4% for the third straight quarter. One might have expected that cap rates would drop this quarter given the fed’s lowering of the fed funds rate three times in four months, but this pattern shown here demonstrates how investors are taking on more risk in bidding up apartment investments. That said 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 Q3

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. This chart shows how the average prices increased ever so slightly in both the top 10 metros and the top 50 metros. This is consistent with the decline in the cap rate, but note how the average price paid for the top 10 metros of $230,000 per unit IS below the peak of $245,000 paid in late 2018. For the top 50 metros, the average price paid hit a new peak of just over $200,000 per unit. In fact, these trendlines show that the average price paid for the top 50 markets grew more than 10% annually over the last five years. For the top 10 markets, the average annual growth rate is just under 8%.

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 16% of the total sales volume shown here which is much lower than most quarters as New York City’s apartment sales volume fell more than 50% from the previous quarter probably due to concerns from the new rent regulations. New York City’s average price per unit was $371,000, lower than in previous quarters. Still, New York City had seven trades north of $1 million per unit, capturing seven of the top ten trades, including 220 East 72nd Street that sold for $160 million or 1.08 million dollars per unit. Los Angeles saw two trades north of $1 million per unit including 1025 Ocean Avenue, that sold for $25 million. Sales volume in Los Angeles did hit an all-time high of $2.8 billion in the third quarter.

Other metros that saw a noteworthy increase in their average price per unit in the quarter were Washington DC, Fairfield County, Miami, Nashville, San Francisco, and San Jose. Most of these metros have also seen some of the highest multifamily rent growth over the last few quarters as well, and as we saw earlier, some of the highest wage and salary growth. Rent growth in the apartment market was 1.0% in the third quarter of 2019, just below the average for the previous 4 quarters. Annual rent growth was 4.7%. Together, the decrease in the apartment cap rate along with the increase in the average sales price per unit AND moderate but steady rent growth shows that the apartment market remains a preferred asset. All of these measures had decelerated somewhat in the last 2 quarters or stayed flat. Many still worry that the market is getting overheated.

 

Sales Volume

 

National Apartment Market: Indexed Transaction Volume, 2013 – 2019 Q3

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

 

The top 10 metros accounted for 49% of the total volume for the top 50, much lower than most quarters. In the third quarter, volume was flat in the top 50 metros after rising 25% in the second quarter. For the top 10 metros, volume declined 10% in the third quarter after rising 25% in the second quarter.

This chart confirms that this market is cyclical but still of interest to many investors, even in New York City. Aside from Los Angeles, apartment sales volume was higher in Oakland, San Francisco, San Jose, and Sacramento. This suggests that the rent regulations passed in California did not hurt the investment sales market there.


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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