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As Investors Chase Yield, Rich Apt. Pricing Pushes Capital Further Afield

While Best of The Best Properties And Markets Still Rule, Investment Flow Is Reaching Seattle, Denver - Even Housing Bust Markets Like Phoenix And Atlanta
February 27, 2013
The continuing strong recovery of apartment rents and occupancies has not gone unnoticed by real estate property investors, who pushed sales volume to 2007 boom era levels last year -- and even higher sales totals possible in 2013, as a result of the now-closed $16 billion Archstone transaction.

According to preliminary CoStar data, total multifamily sales volume for all markets totaled $29.2 billion in the fourth quarter, the highest quarterly sales volume since second-quarter 2007. More than $84.5 billion in multifamily sales were recorded for all of 2012, a 30% increase over the previous year and the highest yearly volume since 2007's $99.7 billion.

"Sales volume continues to grow quarter after quarter, and pricing continues to get richer. Investors still love apartments," CoStar real estate economist Francis Yuen said during the recent presentation of the year-end multifamily review and outlook.

While buying apartment isn’t cheap, investors have been willing to pay up, and average per-unit pricing of apartments is roughly $120,000 per unit, compared with $112,000 during the 2005-2007 boom period, Yuen said.

Hunt For Yield Continues

Despite their willingness to shell out, more investor capital continued to shift discernably through most of 2012 away from primary and core markets and into secondary and tertiary markets. Despite an uptick in core market sales at the end of the year, the clear trend shows capital moving far and wide inward from the coastal markets.

Two of the largest fourth-quarter deals of the fourth quarter illustrated the flow of capital to markets such as Denver and Seattle. A group led by Urban Partners sold the 325-unit Aspira in Seattle to TIAA-CREF for $164.7 million, or $509,760 per unit.

RedPeak Properties and Principal Enterprise Capital sold a 49% interest in the two-building portfolio of Seasons at Cherry Creek and Glenarm Place in Denver to Allstate Insurance for $127.4 million for a value of $456,140 per unit.

Core deals fell from roughly 39% of total sales volume in 2010 and 2011 to 34% last year. In the third and fourth quarters of 2012, deal volume outside the “sexy six” top core markets of Los Angeles, San Francisco, Chicago, New York, Washington, D.C. and Boston reached its highest levels since 2011.

That said, investors continue to favor New York and Los Angeles, which continues to garner the lion’s share of sales activity - and they’re willing to pay up, with average capitalization rates near 6%. Investors have cooled on D.C. Tech- and energy-centric markets have drawn particular investor interest, with Austin nearly doubling sales volume in the past year and investor favorite Denver also dramatically increasing sales volume. In the housing bust metros of Atlanta and Phoenix, sales are up 30% and 87%.

While investors have started looking in secondary and markets, their preference for central business districts hasn’t changed and urban assets continue to get an outsized share of volume. Investors are targeting the best assets, regardless of metro, and CBD pricing is very rich versus suburban properties, Yuen said.

While the best properties in secondary and tertiary markets are inching up on a higher per-pound basis, they’re still selling at a discount to pre-recession pricing. The best assets in the best markets aren’t selling at discounts at all anymore; in fact there aren’t many deals to be found.

"The fact of the matter is many investors have been simply priced out of these primary markets. So that has opened up the question for investors, do they want to buy the nicest asset in a secondary or tertiary market or a three-Star property in a primary market. Things are certainly spreading out a bit."

Four- and five-star deals in secondary and tertiary markets are inching up on a per-pound basis, but they’re still selling at a discount to pre-recession highs. On the other hand, unlike the best properties in the top markets, at least some deals are still available to be found.

Record-Setting Archstone Sale Likely To Sway Markets - Again

Just as it did six years ago, a single mammoth deal involving Archstone's portfolio reflects the continuing hunger for top properties in the hottest coastal markets. In November, Equity Residential (NYSE: EQR) and AvalonBay Communities, Inc. (NYSE: AVB) agreed to buy Archstone Enterprise LP from Lehman Bros. Holdings for $16 billion in cash and debt.

The Archstone transaction, which just closed this week, includes 133 four- and five-star properties within the core markets of Boston, Seattle, New York, Washington, D.C., San Francisco and Southern California, surpassing the total number of trades for all of 2006 in these markets.

In contrast, there were only 193 top-quality properties traded in these markets in all of 2011, and just 156 trades during 2012 in the entire U.S. marketplace.

The closing of the Archstone sale will likely send 2013 sales volume into the record books, similar to 2007, when Archstone was taken private by Lehman Brothers and Tishman Speyer. With the $22.2 billion trade, second-quarter 2007 volume came in at a dizzying $43.8 billion.

As it stands, EQR and AVB will own a significant chunk of institutional grade apartment properties in the top markets, ranging from nearly 30% four- and five-star properties in Boston and more than 20% of all high-end units in the Bay Area to around 11% in New York.

"Obviously, this control will give [Equity Residential and AvalonBay] significant influence over rents of institutional quality product in these markets," Yuen said.

More Apartment Loans likely for Private-Label CMBS?

With new-issue CMBS transactions experiencing better execution and tighter spreads, conduits are now in a position to compete against the government-sponsored enterprises (GSEs) for loans. Given the surge in apartment property sales in 2012, CMBS investors could very well see an increasing amount of apartment loans in private-label CMBS transactions over the next year, according Wells Fargo Securities. Mortgage rates are converging, erasing the competitive advantage previously enjoyed by the GSEs.

During the peak years of the market from 2005-2007, apartment loans accounted for approximately 15%-16% of private-label CMBS collateral before dropping to under 7% in the following years.
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