Pricing Back to 2007 Levels in Six Top U.S. Apartment Markets

---

The US apartment market is making a strong recovery. In fact, in six of the top markets, pricing has recovered to its peak-- reached in December 2007--or gone beyond it, according to Real Capital Analytics' Commercial Property Price Indices for second quarter 2012. The chart appears in RCA's US Capital Trends apartment report for August.   

The most significant thing about RCA's Commercial Property Price Indices, says Dan Fasulo, managing director at RCA, is that the top four markets--Boston, Seattle, San Francisco and Manhattan--are known for high tech and Boston has exceeded its peak pricing by 13%.

Although August can be a sleepy month for commercial real estate, this past August, sales of US apartment properties were $6.4 billion, rivaling May and June as the most active month this year, according to RCA, which only keeps tabs on properties worth $2.5 million or more.

Sales of garden apartment properties in August totaled $4.4 billion, up 76% year-over-year. while sales of mid and high-rise properties were down 26% year-over-year, according to RCA.

Still Hunter, III, senior vice president of investments at Marcus & Millichap in Ft. Lauderdale, says the reason that the sales volume for garden apartments was higher than that for mid and high-rise apartments "is that there are lots more garden apartments than mid and high-rise apartments  in the world."  There are fewer mid and high-rise apartments because rents need to be higher than for garden apartments since they are more expensive to operate, he says.

Nationally, cap rates in the apartment sector averaged 6.1% from May through August and average unit prices trended higher, although appreciation seems to have slowed during the summer months, according to RCA. With fewer trophy properties driving mid to high-rise volume and prices, average cap rates did go slightly higher in August.

In South Florida, "Class A multi-family properties can trade for a 4 cap, as high as a 6 cap for a B apartment asset and even a 9 cap for a low C asset," says Hunter. These cap rates are about the same as a year ago, although maybe slightly lower, but prices per unit have increased because there are higher rents, less vacancies, no concessions and ancillary income from apartment properties in South Florida, he says.

In South Florida, there are fewer distress sales in the apartment market, a greater demand for product and more favorable financing, which drives values, says Hunter. Most distressed deals have been worked through and for the ones that are still around, there is enough demand that they are no longer trading at a big discount, he says.

"I have a deal now called Lakeside Villas at Kendall, a 190-unit development, which was a failed condominium conversion," says Hunter. "The development, which is now stabilized, is in bankruptcy and will be sold at auction on October 9th for about $15 million, or $79,000 per unit, which is a market price," he says. The way that Hunter knows that he will get a good price? "There is a stalking horse bidder who will pay $14,250,000 for the whole development," he says. "A year ago, we had offers for millions less," says Hunter.

The rental market in South Florida is very strong, says Hunter. "Rents (in South Florida) will continue to grow as the economy improves although maybe not at the same pace," as over the last year or so.