Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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the apartment stock is valued less than $2 million with properties that typically range between 5 and 15 units, most of which are bought by local investors. "Te bulk of the fortunes made in San Diego apartments are in renovating 1970s assets and raising rents more than 10 percent," Moore says. Tat has been a common theme for a generation and is still prevalent in today's market, he adds. For example, Moore sold a nine-unit property last spring that had not been renovated in more than 20 years. Te property received multiple ofers and ended up selling above list price with a signed purchase agreement within two weeks. Te new owners completed renovations and raised rents by more than 20 percent within six months. "It is still a seller's market. Tere are still more than 20 buyers for every seller," Moore says. Multifamily Asking Rents vs. Effective Rents $1,200 $1,150 $1,100 $1,050 $1,000 $950 Despite its continued performance, the apartment sector is not immune to the efects of rising interest rates and higher capital costs for buyers and owners. Since mid-May the 10-year Treasury rate has increased about 100 basis points from 1.9 percent to nearly 3 percent as of mid-September. Higher interest rates naturally raise questions about the subsequent impact on operating income and cap rates. Interest rates going up normally means that cap rates are going up. "We know that's coming. It just hasn't happened yet," Stone says. During second quarter, garden apartment properties sold for an average price per unit of $85,046 and an average cap rate of 6.5 percent, while mid- and high-rise apartments sold for an average price per unit of $201,515 and an average cap rate of 5.2 percent, according to RCA. One theory is that a rising interest rate environment means that the economy is improving, which will allow buyers to justify paying premium prices. Buyers could argue that they will now be able to Multifamily Vacancy vs. Inventory Vacancy Rate % Chg Inventory 2.0% 9% 8% 7% 1.5% 6% 5% 1.0% 4% 3% 0.5% 2% 0% 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 2Q 2013 1% Source: Reis 28 November | December | 2013 0.0% $900 Asking Rent Effective Rent 1Q 2008 2Q 2008 3Q 2008 4Q 2008 Y 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 Y 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 Y 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 Y 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Y 2012 1Q 2013 2Q 2013 Price Correction Ahead? Source: Reis underwrite more aggressively with expectations that they will be able to push rents higher more quickly. Te problem is that apartments are already coming of a streak of rent increases, and most industry experts are projecting fewer rent increases in 2014. Rents in class A properties in particular have increased considerably during the past few years and are now bumping up against the ceiling in many markets. "While we still expect some rental rate increases, they are not going to be the 5, 6, and 7 percent increases that we saw two years ago," Stone says. Now owners are just hoping to get annual increases of 2 to 3 percent, he adds. Although competition will keep pressure on pricing, a shif is inevitable, especially if rates continue to rise. Te rising interest rates have yet to impact cap rates in markets such as northern New Jersey. Tus far, cap rates remain near historical lows in every county, generally averaging in the mid-6 percent range and dipping below 5 percent for top properties in the best locations, McConnell notes. However, that shif will eventually occur as both sellers and buyers adapt to the higher rates and adjust expectations. "Some of the properties I sold in the low interest rate environment in frst quarter wouldn't sell at the same price today," he adds. Quest for Yield Continues Te competition for properties coupled with higher interest rates is prompting buyers to adjust both return expectations and investment strategies. Buyers are continuing to venture into secondary markets in hopes of fnding more favorable pricing. Although major markets such as Los Angeles, Washington, D.C., and New York City are still posting the highest sales volumes, there is a notable increase in sales in secondary markets such as Charlotte, N.C., Jacksonville, Fla., and Raleigh/Durham, N.C. Commercial Investment Real Estate