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NEW YORK CITY-Even the flow of capital from Fannie Mae and Freddie Mac couldn’t protect the multifamily investment market from the impact of the credit crunch. Deal volume has plummeted from last year’s levels, reports Real Capital Analytics in its most recent report. In fact, activity was off in nearly every metric the locally-based firm utilizes, including dollar volume, square footage, number of properties sold and deal count, and are down for both single-property as well as portfolio trades.

Between January and March, about $12.1 billion of multifamily deals worth at least $5 million closed, down 40% from the $20.7 billion that were completed in the first quarter of 2007. Transactions involving both garden and mid/high-rise assets were down 51%, as were one-off deals. Portfolio sales also dipped, but by only 9%; RCA analysts point out that the bulk purchase activity was bolstered by UDR Inc.’s $1.7-billion portfolio sale.While buyers may be visibly retreating from the market, it seems that sellers haven’t received the memo, yet. “Asking prices have yet to reflect a significant rise in cap rates,” says RCA, “but more sellers are becoming cognizant of the new pricing paradigm and others are choosing to pull assets from the market.” Property owners put another $17.8 billion worth of communities on the market in the first quarter, representing a 41% surge from the same period last year. After the credit crunch hit, would-be sellers unloaded $50 billion in apartments onto the auction block.”While average cap rates are up modestly, apartments have not witnessed the clear inflection point as other property types, where cap rates are up 50 to 75 bps since the onset of the credit crunch,” researchers add. “For former high-flying condo markets, average prices are well off their highs, but there are still record deals being reported in markets such as Manhattan, Seattle and Houston.” Indeed, some areas fared better than others. For one, those locations with heavy exposure to assets involved in the UDR deal saw their activity level rise. In Columbus, OH, deal-making was up a whopping 224%; in Raleigh/Durham, NC, 104%; and 65% in Houston. Still, more than two-thirds of apartment markets in the US saw lower sales in the first quarter versus the same period in 2007.

Drilling down into individual markets, the New York City boroughs saw sales dip a bit, to more than $2 billion of assets over the past year. With a historical high of just $117,000 per unit, many investors are choosing the city’s outer boroughs over Manhattan, where rental assets are trading at an average of $350,000 a unit. A bulk of the players there were private, but several national and institutional funds were also active in the first quarter.

Houston was one of the rare markets to see sales volume surge, with a near record $831 million of properties trading in Q1, including several portfolio sales. Despite this, average pricing is down, but that’s less of a reflection of market conditions than it is of the asset mix that changed hands. “And with commodity prices hitting record highs, Houston is getting even more investor attention as a market that could withstand a downturn,” RCA says.

In Phoenix, the fallout of the condo conversion and single-family market boom is taking its toll. The market has gone from being the most active, in terms of property sales, to hitting its lowest point in seven years, with only $272 million in deals taking place. Prices seem to have peaked, and Phoenix is now facing an oversupply situation, thanks to a glut of unsold units. Considerably more than $1 billion in communities have been put up for sale in the past few months.

Orlando is another casualty of the condo and housing market bust. Transaction volume there has also hit an all-time low since 2001, $139 million, with only six communities trading during this quarter versus five times that many at the height of the condo boom. Despite a low trading level and buyers’ preference for high-quality assets, average pricing has remained consistent at around $90,000 per unit. Meanwhile, in Raleigh/Durham, DC, a record $700 million of properties were sold in Q1, a 250% leap over last year–and the UDR portfolio wasn’t the only driver. Average pricing has remained steady at $70,000 for the past two years, and the market is attracting “a healthy mix” of institutions, funds, national operators, REITs and 1031 buyers.

In California’s Inland Empire, however, only $120 million worth of communities changed hands in the first three months of the year, off 66% from the three-year quarterly average. While an average of 14 assets traded per quarter in the past few years, only four were sold between January and March 2008. “While pricing is up, this is more reflective of limited data points and a flight to quality, rather than increasing asset prices,” says RCA.

Across the board, it seems buyers’ pockets have gotten shallower–only 12 apartment transactions have surpassed the $100-million mark this year while 22 deals of that size closed in the first quarter of 2007. Gone is the “bigger is better” mentality that pervaded the market in 2006 and early 2007, when lenders’ purse strings and underwriting criteria were loose, investors had heavy pocketbooks and both had an itch to place capital, and were, therefore, more willing to pay premiums for larger assets and portfolios. A look at the one-off property sales that took place in the first quarter shows this trend has been reversed. “The premium that was being paid for large deals appears to have evaporated as average prices for apartment deals worth more than $40 million are down far more than smaller properties,” say RCA analysts. What’s more, the average price of properties changing hands for less than $10 million is actually up, compared to a year ago.

CHART:Sales Down Across All Metrics

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