IRVINE, CA—Like all commercial real estate, the apartment market is vulnerable to a rise in interest rates. Cap rate spreads have fallen in the last few months to offset the gains in rates, but that cannot last forever, Ten-X’s senior quantitative strategist. Chris Muoio tells GlobeSt.com. As we previously reported, according to the firm’s March Commercial Real Estate Nowcast. the apartment sector posting a 1.2% gain in pricing during March—the strongest growth among any of the five CRE sectors.
We spoke with Muoio about the factors that make apartment investment so strong and whether or not the sector is iron-clad at this point.
GlobeSt.com: What about the apartment sector gives it such long legs?
Muoio: Apartment pricing has had such a strong run due to the strong fundamentals underlying it. Demographics and low homeownership have driven robust absorption, which has been able to mostly keep pace with supply additions and keep vacancies low. This low vacancy environment has enabled strong growth in rents. The strong NOI growth in the segment has enabled continued price appreciation.
GlobeSt.com: What could possibly derail it?
Muoio: Like all commercial real estate, the apartment market is vulnerable to a rise in interest rates. Cap rate spreads have fallen in the last few months to offset the gains in rates, but that cannot last forever. On the fundamentals side, a rise in homeownership would cause absorption to fall swiftly since supply additions are robust, resulting in rising vacancies and denting rent growth.
GlobeSt.com: Could the sector truly be iron-clad at this point?
Muoio: There’s no such thing as an iron-clad financial asset. Our recent research has led us to believe we may be much closer to a peak in apartment pricing than many think, especially in trophy markets, where supply has caught up with or is exceeding demand and cap rate spreads are tightest. That is causing vacancies to either stagnate or rise with even more supply set to hit the market, and cut into rent growth and NOI gains. While the apartment market remains healthy overall, it is becoming increasingly risky for investors.