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Who Is Buying All These Apartment Buildings Anyway?

April 24, 2013
By: Mark Hickey, Quantitative Analyst

It's no secret that the apartment capital market has been white-hot lately. In fact, 2012 sales volume of $65.8 billion came close to the all-time high of $66.2 billion reached in 2005.

Private developers/owners were the most active buyers in 2012, with a combined 49% of all sales (by dollar volume), similar to their share of sales from 2005-2012. Institutional investment managers accounted for 19% of apartment property sales, about what they averaged from 2005-2012; however, public REITs have been more active of late, accounting for about 12% of all apartment sales, up from 9%.

And the story of who's selling is pretty much the same, except that public REITs accounted for far fewer dispositions in 2012 than they did from 2005-2012. In fact, public REITs were the largest type of net buyer in 2012 by a considerable margin, with a volume of $3.5 billion.

This trend is no doubt the result of a giant increase in capital offerings for REITs.

The chart below shows the capital offering for REITs on the right axis and trading volume on the left axis. From 2008-2009, public REITs were large net sellers, as their share prices dropped and they sold off assets to maintain their LTVs, accounting for 20%-25% of all apartment sales by dollar volume.

However, as REITs regained favor with investors, it became easier and cheaper for them to raise capital, and the amount of cash they had to put to work grew tremendously. In fact, capital raised in 2012 was a staggering 20 times larger than it was in 2008, though $3.4 billion of last year's total was the result of the Archstone/Equity Residential/Avalon Bay mega-deal.

This means that it's gotten pretty hard to outbid a REIT that has set its sights on buying an apartment property. Dividend yields are only in the threes, so it's okay for a REIT to pay a cap rate that's in the fours. It also means that REITs are doing a lot of development. After subtracting $3.5 billion in net buying and the Archstone buyout from total capital raised, REITs are spending as much as $3 billion on building their own properties, which is not surprising when they can build to a 6% cap (or higher).

How long other investors will be competing with REITs depends on where public apartment REIT pricing is headed. Over the past three years the stock prices for REITs have had a compound annual growth rate of 28%, compared to 13% for the S&P 500. Is this perhaps a sector bubble, or just a bounce back from the recession?

If investors do fall out of love with public apartment REITs, capital offerings will decrease dramatically and the door will open wider for everyone else, especially those who want the higher-quality assets that REITs have traditionally favored.

Mark Hickey is a quantitative analyst with CoStar Group in Boston.

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