Misner expects this trend to continue into the new year. Demand factors for class B are much more constant than for class A, “no matter where you are in an economic cycle,” Misner says. And while the US is moving into a new political era where nobody really knows what the next two years will bring, “we're also in an increasing economic cycle, which is good news.” Among other things, it means that people in class B properties may be able to afford a little more rent, “provided that there's a value for them.”

For investors in the near term, class B is the least risky, Misner explains, because that's where most renters can be found. Class A is still a little riskier on account of there being fewer of the higher-income jobs that are necessary to afford class A rents.

Moreover, he says, growth in high rents is a risk factor in and of itself. “You have class A apartments that are getting more than $4 per foot” in rents. “Is that really sustainable?” Class B rents relative to the income levels of tenants are a more reasonable 25% to 40% of monthly take-home, compared to upwards of 60% for class A units.

Similar dynamics are at work in secondary and tertiary locales, because even those markets have become “net growers” thanks to the influx of Millennials, says Misner. “They're starting to see the impact of economic growth,” so buying in such markets is “not as risky as it used to be.”

Berkadia also forecasts more supply coming on line in 2017: 320,630 market-rate units, mainly class A, up from 303,760 deliveries this year. Will the influx of new supply limit class A landlords' ability to increase rents? “It's market by market,” Misner says. “The industry as a whole is still going to be underserved.”

He notes that there's still a high percentage of Millennials living at home, and eventually they'll move out and form households. “The question is: will there be enough Millennials moving out of their parents' homes, and will the creation of jobs be enough to support all of the new class A supply coming on line?”

In contrast to other markets that Berkadia tracks, Washington, DC in the past few years has seen flat rent growth in the class A space because new supply kept up with demand. Now it's likely that there will be more rent growth in DC than there has been in some time, says Misner. However, in Houston and in some other markets, “there are probably a few too many units for the demand.”

Several economic factors have resulted in net positives for the multifamily sector and prices in core markets are at an all-time high. But just how long can the market continue on this trajectory? Join us at RealShare Apartments East on Feb. 28 and March 1, 2017 for insights on succeeding in the right markets as well as navigating and finding opportunities in the more challenging ones. Learn more.

BETHESDA, MD—Powering a 9% year-over-year increase in the number of apartment transactions is investment activity in the class B sector, Berkadia says in its National Trends reports, issued Tuesday. Class B sales rose more than 20% on a Y-O-Y basis, while the price per unit for class B properties advanced 11.1% to $125,881, with cap rates compressing 20 basis points to 5.8%.

“It's clearly a pursuit for higher yields,” Keith Misner, SVP and head of investment sales at Berkadia, tells GlobeSt.com. “And that's how it should be. There's supposed to be a premium for going further out in classes of properties. The class C property in a tertiary market should have a however-many-bps-higher cap rate than a class A property in a primary market.”

But as the multifamily sector remains a hotbed of investment activity, “people have exhausted the As in the primary markets and they're moving further down the matrix, if you will. What happens is that everybody knows that, and the higher yield gets compressed due to the supply/demand factor.”

There's also the value-add factor driving sales outside the top-tier markets and properties: “the apartment complex that's 20 or 25 years old and needs some sort of improvements that renters are willing to pay more for,” says Misner. “There's more opportunity because you can improve it and sell it at a higher NOI, faster than you otherwise would.”

Misner expects this trend to continue into the new year. Demand factors for class B are much more constant than for class A, “no matter where you are in an economic cycle,” Misner says. And while the US is moving into a new political era where nobody really knows what the next two years will bring, “we're also in an increasing economic cycle, which is good news.” Among other things, it means that people in class B properties may be able to afford a little more rent, “provided that there's a value for them.”

For investors in the near term, class B is the least risky, Misner explains, because that's where most renters can be found. Class A is still a little riskier on account of there being fewer of the higher-income jobs that are necessary to afford class A rents.

Moreover, he says, growth in high rents is a risk factor in and of itself. “You have class A apartments that are getting more than $4 per foot” in rents. “Is that really sustainable?” Class B rents relative to the income levels of tenants are a more reasonable 25% to 40% of monthly take-home, compared to upwards of 60% for class A units.

Similar dynamics are at work in secondary and tertiary locales, because even those markets have become “net growers” thanks to the influx of Millennials, says Misner. “They're starting to see the impact of economic growth,” so buying in such markets is “not as risky as it used to be.”

Berkadia also forecasts more supply coming on line in 2017: 320,630 market-rate units, mainly class A, up from 303,760 deliveries this year. Will the influx of new supply limit class A landlords' ability to increase rents? “It's market by market,” Misner says. “The industry as a whole is still going to be underserved.”

He notes that there's still a high percentage of Millennials living at home, and eventually they'll move out and form households. “The question is: will there be enough Millennials moving out of their parents' homes, and will the creation of jobs be enough to support all of the new class A supply coming on line?”

In contrast to other markets that Berkadia tracks, Washington, DC in the past few years has seen flat rent growth in the class A space because new supply kept up with demand. Now it's likely that there will be more rent growth in DC than there has been in some time, says Misner. However, in Houston and in some other markets, “there are probably a few too many units for the demand.”

Several economic factors have resulted in net positives for the multifamily sector and prices in core markets are at an all-time high. But just how long can the market continue on this trajectory? Join us at RealShare Apartments East on Feb. 28 and March 1, 2017 for insights on succeeding in the right markets as well as navigating and finding opportunities in the more challenging ones. Learn more.