Apartment Investing — Cap Rate Divergence
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.
From a small northwestern observatory... 
Wonder if this is due to institutionals “having” to buy in order to maintain asset allocations in the wake of stock gains.
This could be exacerbated by competition from funded funds that missed the down and dirty buying opportunities they expected and are faced with doing any deal or having to return money – they’ll draw less heat for acquiring good quality assets.
I also suspect the cap rates are down-weighted by bidding for portfolios of high quality assets. Great opportunity to acquire a lot of real estate in readily marketable denominations. We’ve seen a number of such sales (office) happen in the past month or two. A buddy of mine at CW said that portfolio deals (office) are ringing his bell.
So, at these rates, is it time to sell apartments and (soto voce) buy offices?
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Chris Miner
May 31, 2011 at 3:51 pm
Cap rates down because everyone read my article about the coming mini-boom in real estate, http://businomics.typepad.com/businomics_blog/2011/03/the-coming-mini-boom-in-commercial-real-estate.html.
Nutshell: we’re underbuilding in many categories, and with credit hard to come by, demand will recover faster than supply.
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Bill Conerly
June 1, 2011 at 10:05 am