That's not to say the sector is performing well. Rather, the national average vacancy rate sits at a historic high, climbing 130 basis points over the year to hit 8% at year-end, points out PwC, citing Reis data. Rent cuts and concessions—including an average of three months' free rent, reduced or eliminated deposits and fees and merchandise giveaways—are now common practice in just about every market. The multifamily market, many investors believe, will "bump along the bottom" this year, with conditions changing little.
Like in other property sectors, sales activity has diminished for apartments, but demand is high for well-located, high-quality assets. PwC notes that a 92% occupied, 612-unit property in a good location generated 14 bids during its 21 days on the market, before being sold for $54 million to the Prime Group in a deal that took just two days to close. Another first-quarter deal involved a 254-unit asset near the California State University, which Strata Equity bought for $21.2 million, representing a 7% overall cap rate.
Overall cap rates for apartments have actually fallen over the final three months of last year, ranging from 5% to 11%, with an average of 7.85%, down from 8.03% in the third quarter of 2009. However, the current cap rate was still 97 basis points higher than it was a year ago. The average residual cap rate isn't that far off, coming in at 8.01% this quarter, also an 18-basis-point decline.
Discount rates, or IRRs, on unleveraged, all-cash deals remained relatively unchanged quarter-to-quarter, 10.18% in Q1, but were up 113 basis points from last year. Meanwhile, properties for sale are sitting on the market for shorter lengths of time. The average asset sold within 8.06 months this quarter, a 9.03% drop from the prior quarter. In terms of pricing, those polled said apartment prices nationally will decrease an average of 3.81% this year, with responses ranging from a 25% value decline to 25% pricing uptick.
On a regional basis, the performance of the apartment market depends largely on the performance of the individual markets' employment scene. In Washington, DC, for example, where the federal government has been boosting the job numbers, vacancy rates were little changed over the past six months. Rents in the Mid-Atlantic region actually saw a 60-basis-point uptick during that time. The pace of property sales has picked up in both the Mid-Atlantic and Pacific regions, but uncertainty has brushed somewhat of a negative film over projections for rent growth. Cap rates have also decreased in both regions by 50 and 46 basis points, respectively. The bulk of survey respondents feel that multifamily market rents should grow by an average of 2.41% over the next eight years, following a 91-basis-point decline in the first year.
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