With per-unit prices paid for apartment units at a cyclical high, particularly for top quality assets, investors who purchased or developed multifamily communities very early in the recovery or during the recession are cashing out before a combination of rising new supply and expanding cap rates cuts into selling prices.
Both private owner and REITs have become net sellers of apartments as prices rise, particularly on high-end projects. AvalonBay Communities Inc. (NYSE: AVB
) reported that first-quarter earnings rose 47%, largely on the sale of its 323-unit Avalon on Stamford Harbor community for $115.5 million. AVB netted a gain of $70.9 million on the sale of the property, which had bee in its portfolio since 2003.
Other companies that developed and held apartment projects earlier in the real estate cycle are also in disposition mode. Since January, Los Angeles-based CIM Group has sold apartment and retail assets totaling 570 residential units and about 1.42 million square feet of retail space.
In its latest move, CIM last week sold four apartment properties in Anaheim, CA. The four- and five-story apartment buildings -- Promenade Lofts, Doria Lofts, Carnegie Plaza and Broadway Arms -- total 276 units, with about 27,000 square feet of ground floor retail. CIM developed the properties in 2006 through 2008 through a public/private partnership with the city of Anaheim.
"We were able to create real estate assets that have reliable and predictable income streams, sought-after by many domestic and global investors, and this has been demonstrated by the success we have had in selling a number of our retail, hotel, and multifamily assets since the beginning of the year," said CIM cofounder and principal Shaul Kuba.
Luis Mejia, director of U.S. research, multifamily for CoStar Portfolio Strategy, said the CIM Group sale and others in recent months are a natural function of the ebb and flow of the apartment investment market cycle.
"As the cycle matures, some investors believe this is the right time to capitalize on the apartment value gains of the last few years," Mejia said. "With the possibility of interest rates increasing, which could eventually push cap rates up, and the potentially negative effect of supply on prices, a number of investors see selling as a viable portfolio strategy."
Mejia said he expects some of the sellers will recycle some of their sale proceeds into different apartment markets or properties, while others will consider rotating capital into other property types.
Despite the profit-taking, Mejia said multifamily fundamentals remain strong and he doesn't forecast a sharp jump in the near future in apartment cap rates, which are still wide relative to U.S. Treasury rates.
Even if interest rates begin to increase as expected, cap rates are not likely to rise in tandem, Mejia said. When they do eventually increase, it will likely be at a slower rate than interest rates, softening the impact on prices, Mejia said.
"Even as profit-taking sales like these become more common, the cycle should continue to mature slowly, unless there’s a sudden economic event that leads to much higher risk premiums," Mejia said.