Cap Rates Inch Up for B & C Apartments

In pockets across the country, the cap rates behind apartment lending are inching up. But it’s not for the reasons that keep investors up at night. For institutional buyers and lenders, the top-end of the market has not shaken its luster, even where rent growth has slowed. Nor have price pressures ebbed significantly. Instead, the metrics are drifting higher because the range of assets trading in the market has broadened. For a growing share of non-institutional buyers, pricing at the median is too steep. At the lower bound of the investable universe, rents on higher-yielding properties are now rising at faster clip. Yield-hungry investors with ample access to debt are responding in kind — just not at the current pace of fundamentals.

To the great relief of the institutional ranks’ recent buyers (and the equal dismay of many credit risk officers), cap rates and debt yields on strongly contested, high-value assets declined in the first quarter (see our Q1’13 summary). For properties valued above $25 million – either by sale price or appraisal at refinancing – the national average cap rate fell to 5.6 percent. Debt yields for this cohort slipped to a record-low of 8.3 percent. Reflecting a more crowded marketplace of lenders, investors were able to secure more than $12 in financing for every dollar of NOI.