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North Delaware Apartment Sales Climb to New Heights

CoStar Market Insights: Value-Add Opportunities, Relatively High Cap Rates Are Attracting Record Levels of Apartment Investment to New Castle County
August 10, 2018

The 228-unit Christina Mill apartment complex in Newark, DE, which sold for $39.3 million in June.

New Castle County Delaware is currently bucking the national trend as its apartment sales volume surges to all-time highs.

Overall U.S. apartment sales peaked in 2016, but gradually rising interest rates and concerns about overbuilding of luxury units in many major markets both caused apartment investment to pull back slightly in 2017 through 2018.

These same factors are only driving more investors to North Delaware, where apartment sales rose to 4,200 units over the past 12 months, more than double the annual level of sales activity averaged there during either 2006 to 2007, or 2015 to 2016.

Interest rates are slowly rising and the yield on low risk bonds such as the 10-Year U.S. Treasuries is approaching 3 percent. As this trend plays out, the 4 to 5 percent cap rates available to buyers of apartments in the nation’s top central business districts and prime suburban submarkets are becoming comparatively less attractive to diversified investors looking for returns well in excess of borrowing rates, and of yields on fixed income investments.

Apartment cap rates in second tier markets and neighborhoods such as North Delaware continue to provide significantly higher cap rates, which remain attractive to yield-seeking investors.

A handful of larger apartment sales in North Delaware have closed at cap rates over 6 percent during the past four quarters, including Lakewood, NJ-based Concordia Properties’ acquisition of Spring Crossings in Newark at a 6.2 percent cap rate, and Staten Island, NY-based Edward Welsh III’s purchase of the Woodview Apartments in Wilmington at a 7 percent cap rate.

Plenty of North Delaware apartment sales have closed at lower cap rates (in the range of 5 to 6 percent) recently, but these often involve properties with significant potential upside in rents via renovation.

A prime example was Capano Residential’s acquisition of ParQ at the Square in Wilmington in the second half of 2017, which closed at a 5.4 yield. The property’s prior owner, Merion Realty Advisors, had renovated 84 of the building’s 231 apartments and these renovated units were garnering, on average, a $300 monthly rent premium over the property’s un-renovated units. When the Christina Mill Apartments in Newark sold at a 5.9 percent cap rate during June 2018, only 50 percent of its units had been recently renovated at the time of sale.

In addition to higher cap rates, North Delaware properties also offer investors less exposure to risks of overbuilding which are mounting in some of the Northeast’s prime apartment submarkets.

New Castle County’s apartment inventory has only grown by 5 percent cumulatively over the past five years, compared to between 20 to 25 percent growth in submarkets such as Center City Philadelphia and downtown Washington D.C.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

Learn how CoStar Market Analytics can add to your market knowledge, helping to minimize risk and maximize returns.

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