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2C — June 26 - July 16, 2015 — Mid-Year Review — M id A tlantic
Real Estate Journal
M ulti -F amily
By Thomas McConnell, CCIM, Redwood Realty Advisors Red hot apartment sales set to continue
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partment properties have been a hot com- modity among both
is overheated, and whether or not it is still an oppor- tune time to buy more, or if perhaps it is a better time to sell existing apartment properties before the market shifts. There is no one “right” answer to that question, as there are still good opportu- nities for both buyers and sellers depending on the circumstances. Apartments have been a favorite of the investment industry in recent years, and that momentum has clearly continued into 2015. The nearly $20 billion in multi-
family properties that traded hands during first quarter is up 55 percent over the same period a year ago, according to data from Real Capital Analytics. Yet despite that robust activity, the industry is probably maxed out when it comes to further cap rate compression. So, what does that mean for buyers and sellers? For apartment owners who may be thinking of selling within the next three years, the time to sell is definitely right now. Prices are at or near peak levels. In addition,
there is far more demand than there is supply of avail- able properties for sale with an incredible amount of capital still waiting on the sidelines to buy multifamily assets. On the other side of the table, there also are still some good buying opportu- nities. At Redwood, we see examples all the time of long- time owners who have not been aggressive in pushing rents higher at their proper- ties. They are content to gen- erate a steady cash flow from a building that has strong
occupancy rather than deal with the turnover associ- ated with raising rents. As a result, new buyers coming in can find properties where rents are artificially low, which creates an opportu- nity for them to boost rents and improve net operating income. Buyers that are willing to roll up their sleeves and do some work, such as making capital improvements, also are reaping the rewards of taking on the added risk. Those value-add situations also tend to attract fewer competitive bidders and more favorable pricing for buyers. Given the highly competi- tive marketplace, it is im- portant to note that buy- ers need to exercise caution and conduct thorough due diligence. For the most part, apartment fundamentals remain strong with healthy demand, low vacancies and steady rent increases. Mil- lennials have played a key role in that demand with not only their preference to rent vs. own, but a strong desire to live in urban areas. That being said, buyers still need to scrutinize individual sub- markets carefully as some pockets have seen a spike in new construction. The one game changer that both buyers and sellers need to keep their eye on is rising interest rates. If interest rates rise even a modest 50 basis points, the value of income producing real estate will likely drop, because the cash-on-cash return for the buyer is going to shift. So, if interest rates tick up, it is go- ing to change the atmosphere for apartment investment activity. Owners who wait may kick themselves later for not sell- ing in this great low interest rate environment. Likewise, the strong buyer demand shows no signs of diminish- ing anytime soon. So, there is clearly motivation on both the buy and sell side to get out in front of any potential increases in interest rates. Thomas McConnel l , CCIM is a managing part- ner at Redwood Realty Advisors in Hasbrouck Heights, NJ. The multi- family investment bro- kerage and advisory firm serves clients in New Jer- sey and New York. n
l arge and small inves- tors in re- cent years. Sales trans- actions have continued to rise, while competition has pushed prices ever higher.
Tom McConnell
One of the most common questions I get asked as a multifamily investment specialist is if the market
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