print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Products
Commercial Real Estate News

The Beginning of the End for the Apartment Pricing Boom?

December 2, 2013
By: Mark Hickey
The apartment boom is eventually coming to an end; it’s only a question of when. An increase in deliveries and a cooling off or stabilizing of purchases by REITs are a couple of the reasons why this property type will likely see a correction in pricing.

New construction is starting to roll in and Exhibit 1 below reveals what the tip of the iceberg looks like. The grey bars show that sales of apartment buildings aged two years or less spiked dramatically in 2012, and that 2013 apartment sales will almost undoubtedly end up passing that.


Share with Your Followers on Twitter


What is perhaps more interesting is that pricing in 2013 has come down from 2012. This does not mean that the market for these types of assets has clearly topped out, but that it could soon.

It’s a matter of basic economics: Demand simply cannot keep up with the supply wave. Otherwise, one has to assume that either more buyers who have been mysteriously lurking on the sidelines will jump into the market, or that current buyers, fueled by even larger capital raises than in previous years, will be able to pick up the slack.

One buyer type unlikely to be picking up the slack is REITs. They have been actively raising capital through a combination of IPOs, secondary equity, and secondary debt, with raises in 2012 reaching an all-time high, thanks in part to the Archstone-Avalon Bay-Equity Residential deal.

These raises have no doubt been helped by the fantastic returns REITs were able to offer from 2009-2012, but that story is changing.

Since the beginning of this year, major apartment REITs have a total return of -1%, whereas the S&P 500 is up 29%. This will undoubtedly impact a REIT’s ability and desire to raise capital in the future.

Exhibit 2 shows the percentage of sales of apartment buildings aged two years or less attributed to REITs. This year through mid-September, they’ve swooped up an incredible 40% of these newer buildings.

So as development continues in 2014 and 2015, what happens if REITs become less active buyers? Prices will likely fall unless another type of investor picks up the slack.

Given the amount of construction coming on line, prices could decline even if REITs maintain their current level of buying activity. These factors are not only likely to affect pricing for newer buildings, but pose a pricing risk across the entire apartment market.
Mark Hickey is a real estate economist with CoStar Group
































































Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.



Advertisement:
John Dixon & Associates: Absolute Auction Selling 320± Properties

 Find us on 

Welcome To CoStar's
Industry-Focused,
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News