From a small northwestern observatory…

The fact that apartment “cap rates” are declining in the face of rising fundamentals is old news. (For the newbies — the “cap rate” is the ratio of net operating income, or NOI, to value or purchase price. If NOI is rising, then purchase prices must be rising even faster, indicating increased investor sentiment.) Indeed, as of April, nationwide, mean cap rates on apartments were back to early 2008 levels. (Again, for the newbies — cap rates on all property types rose during the recession, reflecting both declining fundamentals AND declining investor sentiment.)

The more interesting piece of news comes out of our friends at REIS, who just released a report today showing that Class “A” apartment cap rates have declined much faster than Class B/C, indicating that high-end, investment grade properties are much in favor today for their income by institutional investors.

Those same investors are wary of lower-grade apartment investments, although REIS suggests that this wariness should dissipate over time. This suggests some significant opportunities for developers, turn-around specialists, and other non-institutions during the coming months.