Apartment Market: National Cap Rate Trends
The overall declining trend in apartment cap rates, shown by the teal line in the chart (the moving average), defies the Fed’s increasing of federal funds rate over the last two years. The 12-month rolling cap rate fell 10 basis points to 5.5% in the quarter — the lowest ever. However, the average cap rate (shown by the dark blue line) remained flat at 5.4% in Q4, after falling in previous quarters. This is still the lowest rate ever. We do need to note that this 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.
National Apartment Market: Cap Rate Trends, 2013 Q4 – 2018 Q4
Source: REIS, Real Estate Solutions by Moody’s Analytics
Apartment Market: Average Price per Unit
The top 10 metros for average price per unit in the fourth quarter were New York City, Los Angeles, San Francisco, Phoenix, Suburban Virginia, Seattle, Chicago, Orlando, Atlanta, and Denver. Clearly, average prices are rising faster in this elite category than for the next 40 ranking metros. This shows that investors prefer these gateway cities to the others — a distinction that became more pronounced in 2018.
For the overall 50 metros, the mean price per unit leveled off in the fourth quarter, despite having been steadily increasing in previous quarters. This is entirely consistent with the flat fourth quarter cap rate. Does this mean that the market has plateaued? Will valuations start to come down and cap rates start to increase? The short answer to this question is: not necessarily. This is a one-quarter trend and even the average price per unit is subject to selection bias. The two largest metros — New York City and Los Angeles — saw their average price per unit decline in the quarter as their cap rates rose. In New York, the cap rate increased from 4.4% to 4.8% while in Los Angeles the cap rate increased from 4.8% to 5.1%. However, both metros regularly see minor ups and downs in their cap rate trend lines. Metros that saw a noticeable increase in their average price per unit in the quarter include Charlotte, Detroit, Nashville, Orlando, Phoenix, San Bernardino, and Sacramento. 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 a healthy 4.7% in 2018 — higher than in 2017 (4.0%). Rent growth was positive in every metro. In short, the low but flat cap rate reflects the fact that investors still consider this asset class to be a preferred investment. As long as rents continue to rise, prices will as well. At the same time, cap rates could continue to fall, but not significantly so.
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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