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NEW YORK CITY-Not surprisingly, investment activity in the multifamily sector, like other segments of the industry, fell even more in October. With the global credit crunch in full swing over the past year, a lack of financing and the general uncertainty over the future paralyzed buyers of all kinds. This was reflected in deal volume and velocity, which were a fraction of what they were last year, according to Real Capital Analytics’ most recent Capital Trends Monthly report.

“October 2008 was the first full month in which transaction metrics within property types measure the extent of volume declines in both capital and deal flow since the onset of the crunch,” according to RCA analysts. “The chill that was apparent, even then, has become a deep freeze.”

For all property types, sales volume in October 2008 was a mere $4.76 billion–just a quarter of the level 12 months ago and only 20% higher than October 2006. The flow of transactions two years ago was six times more than October 2008.

For apartments in particular, the downward spiral has been steep and steady. The number of properties that were flipped declined 60% between October 2006 and 2007, and another 70% over the past year. Pricing was stronger last month than prior years, measuring just a 28% loss in volume even though velocity fell, but “the capital drain was a harsh 76% this October, indicating that much smaller as well as many fewer properties are selling.”

It is the price of risk–the spread between cap rates and 10-year treasuries–that has led to the slowdown. Spreads have more than tripled in the multifamily industry–from their low of 81 basis points in July 2006, soon after the condo bust, to 263 basis points last month. The good news is that spreads are still considerably narrower than their widest gap of 429 basis points–reached during the 2002 recession after the Federal Reserve cut rates to a historic low of 1%.

“But we expect further widening in the relatively near term as investors seek compensation for taking on risk in a turbulent economy,” note RCA analysts, eventually hitting 2002 levels as values and cap rates come more in line with reality.

The $33.5 billion in sales year-to-date are 50% less than the first 10 months in 2007. By number of properties, the 1,810 communities that changed hands represented a 44% decline over the 3,235 properties the same period last year.

Although investors continue to favor apartments over most other property types, that may change as employment cuts and the faltering economy slow, or even shrink, household formation levels. The decline is already being seen. About $1 billion worth of those assets were sold in October, down 49% from September and 6% from the prior October; the 52 garden communities sold were the lowest number since 2001. A dozen mid and high-rises traded in October for $263 million, down 57% from September and an 83% drop from the year before.

That didn’t stop buyers from putting their properties on the market. Some $3.2 billion in offerings were put on the block, 10% more than September, and a ratio of three-to-one versus closed deals. It does, however, seem like sellers are more accepting of the market conditions; asking prices on a per-unit basis came down 4% over September, and no deals worth more than $100 million were closed or offered last month. Similarly, cap rates for properties on the market came up 13 basis points since the end of the third quarter. Yet with so much uncertainty in the financial markets and equity capital stuck on the sidelines, RCA expects transaction volume and velocity to remain low.

Also facing pressure is land sales, which have tapered off since the single-family housing bust and economic decline. Activity in terms of entitled land sales in September and October was down 90% over the same two months in 2007. So far this year, land sales have fallen 68%, similar to the decline seen in the core property sectors. The firm, citing figures from Construction Trak, notes that nearly 2,000 projects have been delayed or scrapped since early September.

By volume, sales of condominium and apartment sites are down 90% and 75%, respectively. “Many contracts signed by developers earlier in the year are being terminated, and even markets once considered immune to a slowdown such as Manhattan and San Francisco have seen land sales grind to a halt,” according to RCA.

Prices for parcels have also been impacted; after reaching a high of $1.7 million an acre in late 2006, prices on land have come down by some 25%. Obviously once-hot housing markets like Florida and Nevada have felt the biggest hit, some more than 60%. Other areas that didn’t have as much of a boom–such as suburban Texas–still declined, albeit slightly. Interestingly, land in suburban California continues to appreciate.

It’s difficult to pinpoint exact trends when it comes to land sales and pricing. “At the residential market peak, major CBD condominium sites in global gateway cities were trading in the range of $250 to $450 per buildable square foot,” they point out. “However, with CBD condo land trades having decreased and virtually disappeared through 2007 and 2008, no reliable pricing gauge can be found. For apartment land purchased before the bubble burst, pricing for the most valuable sites came in between $100 to $250 per buildable square foot, although the overwhelming majority of smaller land sites sold well below those levels.”

In the third quarter, very few CBD residential parcels were traded, and even fewer went under contract. “With supply from the 2005/2006 development cycle just coming on line now,” the firm says, “many developers will be cautious about adding additional land inventory until there is some clarity on the absorption of existing available inventory.”

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