NEW YORK CITY-Buyers were more active in the investment market in May, as both the number of properties and sales volume are up 25% over the prior month. Some $2.1 billion in deals closed in May, but that figure was still down 65% from May 2007, reports Real Capital Analytics. Most of the activity, says the locally based firm, is attributable to an up-tick in mid-sized deals of between $25 million and $50 million. About 100 garden communities and 27 mid and high-rise properties traded in May, with volume for both property types half that of last year.
Larger transactions are few and far between--and in both months--there were no deals worth more than $100 million. In fact, in the first five months of the year, only 15 sales surpassed the $100-million mark. That's a contrast from the 40 that were racked up during the same period last year. Altogether, there were $16.4 billion worth of apartment sales since January. That trend may be broken once the numbers for June roll in, since there were eight deals--four one-off transactions and four portfolios--of more than $100 million, reportedly under contract that month. Among them is the $1.4-billion acquisition of GMH Communities' student housing portfolio by American Campus Communities, which has since closed.
Indeed, RCA analysts believe the increase from April to May is a positive sign of things to come. "The sequential increases are likely to continue--the value of deals reported in contract at the end of May swelled to nearly $6 billion," they say, adding that the office segment also recorded "sharp gains" in deals under contract. "It is still unclear if this really is the start of a recovery or just a dead cat bounce. Although the credit markets have improved somewhat, they are nowhere near recovered."
There are still more sellers in the market than buyers, with the $6.8 billion in new listings more than tripling the amount of closings in May. New offerings from January to May--$30.5 billion--almost doubled the sales volume for the period. Further, RCA reports anecdotal tales from brokers that are bringing to market just a portion of the potential supply.
Another observation is that sellers have yet to budge in terms of pricing. On average, researchers note, sellers achieved 94% of their asking prices from the first quarter, down a bit from last summer's credit crunch and a 2% decline from the high of 96%, back during the condo conversion heydays.
Asking and closing cap rates are also starting to widen, further stressing the pricing gap between seller expectation and buyer's willingness to pay. Whereas interest rates have helped to keep cap rates at relatively low levels, the recent moves by the Fed may upend that trend. Interest rates have gone up 80 basis points in the past three months, and cap rates have risen 15 basis points in May alone.
However, mortgage rates aren't the only factor in determining cap rates. The type of property also has a role. The entrance and departure of condo converters impacted caps, and mid and high-rise assets now have much lower cap rates than garden properties, but they're also a bit more volatile, reflecting a much smaller number of deals.
An investor's risk strategy adds another element. Last year, caps on value-add deals rose quite a bit as the housing market declined. "By the start of the credit crunch, buyers and lenders were no longer pricing in the upside of value-added deals and cap rates had come back in line with stabilized or core deals," says RCA. There hasn't been a significant difference in yields since then. The credit crunch also shifted the difference in cap rates between secondary and primary markets, with the former up almost 50 basis points since its onset. The difference between primary and tertiary markets, meanwhile, has gotten even larger.
Early last year, buyers were paying a premium for large assets and portfolios, amounting to a difference in cap rates of 75 basis points. Since last summer, though, it's become harder to finance those large transactions, and thus, caps have gone up about 50 basis points. Rates on smaller deals, meanwhile, haven't changed much since then. "Recent data reveals that cap rates on the larger deals have started to retreat, but with so few large deals trading, the decline may just reflect a flight to quality," observe analysts.In terms of acquisitions, there has been nothing out of the ordinary this year, with no investor group making a significant move into or out of the sector. This, maintains RCA. "reflects the overall uncertainty shared by all."
REITs are still shedding the most communities, racking up $3.7 billion in dispositions since January, with four firms--UDR, Aimco, Equity Residential and GMH Communities--accounting for 75% of all those deals. On the flip side, the most active buyers remain institutions, with $2.5 billion in acquisitions. Still, when one looks at the $37 billion of deals accumulated in the past two years, that figure is still small.
Also active in the segment are equity funds including Northland Investment Corp., Capri Capital, Berwind, Angelo Gordon, Colony Capital and the Carlyle Group. As for the rest of the private sector, the strategy is still unclear as they haven't added or subtracted multifamily assets from their holdings.
CHART: Number of Monthly Transactions, By Deal Size
Source: Real Capital Analytics