After several years of near-peak apartment transaction volumes, activity is cooling notably in major metro areas. The volume of assets traded over the last year and the dollar volume following those assets fell by double digits in many major metros, according to data from Real Capital Analytics.
For the U.S. overall, total dollar volume for apartment transactions in the year-ending 3rd quarter 2017 came in 21.8% lower than in the year earlier, while the number of transactions fell 16.6%. Among the 50 largest U.S. markets, the drop-off in dollar volume was most pronounced in Baltimore (-59.9%), New York (-57.3%), Fort Lauderdale (-56.4%), San Francisco (-47.7%) and Cleveland (-46.2%). In terms of the number of transactions in the past year, markets in Columbus (-47.4%), Fort Lauderdale (-44.8%), Tampa Bay (-41.2%), Baltimore (-37.9%) and West Palm Beach (-34.8%) led overall declines.
In the major gateway markets of New York, Bay Area, Los Angeles, Boston and Washington, DC, dollar volume fell a combined 19%, while transactions decreased 13%. Los Angeles was an exception to the broader trend among gateway markets. The number of transactions for assets in the Southern California hub declined 12.4%, but dollar volumes actually rose 6.2%.
Only five major markets – Pittsburgh, Salt Lake City, Connecticut, Detroit and Seattle – saw an increase in both transactions and dollar volumes in the past year.
There are a combination of factors pulling down apartment transaction activity. Years of elevated transaction activity has driven up pricing for existing assets, particularly in the urban core areas of major metros. Meanwhile, greater levels of new supply — especially high-end product located in urban centers – have increased competition among existing institutional product. In urban centers, cap rates have trended higher as pricing has risen and rent growth has slowed. In 3rd quarter 2017, annual rent growth for Class A assets registered at 3.4% — still healthy, but down from the peak of 6.1% reported in 2nd quarter 2015.
Another factor is rising interest rates, though rate increases are expected and calculated in many apartment deals. As of last Wednesday, the Fed has now raised interest rates three times this year based on a very healthy labor market and inflation running below a target of 2%. Investors may fear a rising interest rate environment will cause property values to fall and returns to erode. That fear is likely misguided as multifamily returns during a rising interest rate environment generally remain stable and the Fed has maintained a predictable pace in raising interest rates. The Fed expects to follow the same path next year with three quarter-point increases in 2018.