Graphic: Where is rent increasing and decreasing the most?
Eager apartment buyers helped to produce a record sales volume in 2015, and many expect that buying streak to continue in 2016.
Apartment sales surged 33% last year to a high of $151.8 billion. That momentum has carried over into first quarter with another $38.6 billion in sales that closed, according to data from Real Capital Analytics. In fact, apartments appear to be bucking the broader trend that saw a slowdown in commercial real estate sales during first quarter. Real estate sales across all major property types dropped 20% to $111 billion during first quarter. Apartments were the only sector that reported a year-over-year increase with sales volume rising 12%.
Strong fundamentals, including historically low vacancy rates and favorable rent growth, have fueled investor demand for apartments for the past few years. Vacancy rates remain healthy at 4.5%, and although the pace of rent growth is slowing, it remains positive with an increase of 0.5% in first quarter, according to Reis Inc. Some markets are experiencing even bigger jumps in rents due to strong demand. According to ABODO, Seattle saw the biggest monthly increase with rents rising 11% as of May 1st, followed by Anchorage at 9% and Kansas City, Mo. at 7%.
Given that backdrop of still strong fundamentals, it is no surprise that investors have continued to be aggressive in their bidding to win deals. Cap rates compressed a further 30 basis points last year to average 5.9% nationwide, while the average price increased 9% to $124,500 per unit, according to Berkadia. Although institutional buyers continue to favor newer, Class A properties, values for Class B and Class C properties also have been climbing as investors look to buy assets with greater upside potential to make improvements and raise rents. Cap rates for Class A properties are at 5.4%, while Class B and C apartments are averaging rates at 5.9% and 6.2% respectively, according to Berkadia.
Student housing represents a fraction of the broader multifamily sector. However, it is a niche that is garnering more investor interest these days. Student housing investment sales were expected to reach $4.5 billion last year – up 50% compared to the $3 billion in sales in 2014, according to a recent article in National Real Estate Investor. Part of the appeal is that student housing properties are offering slightly better yields with cap rates that are typically above 6%.
In addition, that investor interest doesn’t appear to be waning. For example, Campus Advantage recently closed on the purchase of The Edge in Orlando, Florida. They reportedly acquired the 312 unit / 930 bed-property near the University of Central Florida for $40.9 million. The Austin-based firm is one of the largest buyers of student housing properties in the U.S. and has completed more than $675 million in acquisitions since it was founded in 2003. In a statement announcing The Edge acquisition, Campus Advantage Senior Vice President Michael Orsak said he expects 2016 to be the most active year the company has seen so far.
The sustained buyer demand will continue to keep pressure on sale prices, especially for best-in-class assets in major metros. The competitive marketplace is pushing investors further out into smaller secondary and tertiary markets in search of higher yields. However, the rise in new construction in many cities may make buyers more cautious going forward.
Developers completed 250,000 units last year and are expected to deliver another 285,000 units this year, according to Marcus & Millichap. Marcus & Millichap expects near record transaction activity to continue in 2016, but buyers may be less aggressive in pricing and there could be a bigger gap that emerges between seller’s asking price and the price that bidders are willing to pay.