NEW YORKCITY-Buyers were more active in the investment market in May, asboth the number of properties and sales volume are up 25% over theprior month. Some $2.1 billion in deals closed in May, but thatfigure was still down 65% from May 2007, reports Real CapitalAnalytics. Most of the activity, says the locally based firm, isattributable to an up-tick in mid-sized deals of between $25million and $50 million. About 100 garden communities and 27 midand high-rise properties traded in May, with volume for bothproperty types half that of last year.
Larger transactions are few and far between--and in bothmonths--there were no deals worth more than $100 million. In fact,in the first five months of the year, only 15 sales surpassed the$100-million mark. That's a contrast from the 40 that were rackedup during the same period last year. Altogether, there were $16.4billion worth of apartment sales since January. That trend may bebroken once the numbers for June roll in, since there were eightdeals--four one-off transactions and four portfolios--of more than$100 million, reportedly under contract that month. Among them isthe $1.4-billion acquisition of GMH Communities' student housingportfolio by American Campus Communities, which has sinceclosed.
Indeed, RCA analysts believe the increase from April to May is apositive sign of things to come. "The sequential increases arelikely to continue--the value of deals reported in contract at theend of May swelled to nearly $6 billion," they say, adding that theoffice segment also recorded "sharp gains" in deals under contract."It is still unclear if this really is the start of a recovery orjust a dead cat bounce. Although the credit markets have improvedsomewhat, they are nowhere near recovered."
There are still more sellers in the market than buyers, with the$6.8 billion in new listings more than tripling the amount ofclosings in May. New offerings from January to May--$30.5billion--almost doubled the sales volume for the period. Further,RCA reports anecdotal tales from brokers that are bringing tomarket just a portion of the potential supply.
Another observation is that sellers have yet to budge in terms ofpricing. On average, researchers note, sellers achieved 94% oftheir asking prices from the first quarter, down a bit from lastsummer's credit crunch and a 2% decline from the high of 96%, backduring the condo conversion heydays.
Asking and closing cap rates are also starting to widen, furtherstressing the pricing gap between seller expectation and buyer'swillingness to pay. Whereas interest rates have helped to keep caprates at relatively low levels, the recent moves by the Fed mayupend that trend. Interest rates have gone up 80 basis points inthe past three months, and cap rates have risen 15 basis points inMay alone.
However, mortgage rates aren't the only factor in determining caprates. The type of property also has a role. The entrance anddeparture of condo converters impacted caps, and mid and high-riseassets now have much lower cap rates than garden properties, butthey're also a bit more volatile, reflecting a much smaller numberof deals.
An investor's risk strategy adds another element. Last year, capson value-add deals rose quite a bit as the housing market declined."By the start of the credit crunch, buyers and lenders were nolonger pricing in the upside of value-added deals and cap rates hadcome back in line with stabilized or core deals," says RCA. Therehasn't been a significant difference in yields since then. Thecredit crunch also shifted the difference in cap rates betweensecondary and primary markets, with the former up almost 50 basispoints since its onset. The difference between primary and tertiarymarkets, meanwhile, has gotten even larger.
Early last year, buyers were paying a premium for large assets andportfolios, amounting to a difference in cap rates of 75 basispoints. Since last summer, though, it's become harder to financethose large transactions, and thus, caps have gone up about 50basis points. Rates on smaller deals, meanwhile, haven't changedmuch since then. "Recent data reveals that cap rates on the largerdeals have started to retreat, but with so few large deals trading,the decline may just reflect a flight to quality," observeanalysts.In terms of acquisitions, there has been nothing out ofthe ordinary this year, with no investor group making a significantmove into or out of the sector. This, maintains RCA. "reflects theoverall uncertainty shared by all."
REITs are still shedding the most communities, racking up $3.7billion in dispositions since January, with four firms--UDR, Aimco,Equity Residential and GMH Communities--accounting for 75% of allthose deals. On the flip side, the most active buyers remaininstitutions, with $2.5 billion in acquisitions. Still, when onelooks at the $37 billion of deals accumulated in the past twoyears, that figure is still small.
Also active in the segment are equity funds including NorthlandInvestment Corp., Capri Capital, Berwind, Angelo Gordon, ColonyCapital and the Carlyle Group. As for the rest of the privatesector, the strategy is still unclear as they haven't added orsubtracted multifamily assets from their holdings.
CHART: Number of Monthly Transactions, By Deal Size
Source: Real Capital Analytics

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