2C — January 27 - February 9, 2017 — 2017 Forecast — M id A tlantic
Real Estate Journal
www.marejournal.com
M ultifamily S ales
By Thomas McConnell, CCIM, Redwood Realty Advisors 2017 Outlook: Apartment Investment Sales
A
partments have been the darling of the inves tment mar -
Coming off a record year of sales in 2015, the apart- ment market ended 2016 on another high note. In New Jersey, for example, annual apartment sales topped $2.7 billion, according to CoStar. Yet that velocity could very well slow in the coming year as an increase in interest rates could have a significant impact on pricing, deal flow and investor strategy. No one has a crystal ball to pre- dict exactly when, or by how much, interest rates might rise in 2017. However, many industry experts anticipate that interest rates will move
higher this year along with stronger economic growth. Stab i l i zed proper t i es would feel the brunt of that impact. Even a modest 50 or 100 basis point increase in the 10-year Treasury, which is used to price long- term loans, could signifi- cantly impact the market. In the current competitive cli- mate, investors have already sharpened their pencils and underwritten deals to a point where every penny counts. Add 50 basis points to that deal in higher capital costs and the cash-on-cash return is completely different.
As an example, an investor decides to buy a $5 million property at a 6.0% cap rate with a 30-year loan of $3.5 million. If the buyer can secure a loan rate of 4.0% then the cash-on-cash return is roughly 6.6%. However, if the cost of that loan increas- es to 5.5% the cash-on-cash return drops to 4.0%. A loan cost of 6.5% would push the return even lower to 2.2%. For the buyer to maintain the original 6.6% cash-on- cash return at a loan cost of 6.5% they would have to pay $3.9 million instead of $5 million.
That example shows how higher capital costs can dra- matically change the risk- reward of a deal and influ- ence the price an investor is willing to pay. Signs of a shift are already starting to emerge. Some investors are unwilling to pay the same price for stabilized as- sets that they paid back in the third quarter, because the 10-year Treasury has jumped about 80 basis points from 1.65% in September to 2.45% as of early January. In contrast, the segment of the market that will likely hold its own even amid high- er interest rates will be Class B and Class C assets that are ideally suited for value-add repositioning. Both buyers and sellers will continue to find good opportunities and aggressive pricing. Long- term owners who have had properties on cruise control for years and not pushed rents higher are a prime tar- get for hungry buyers. Specific to the region that Redwood Realty operates in, New Jersey andWestchester and Rockland counties in New York, there continues to be much more demand than there is available sup- ply of for-sale properties on the market. And those value-add deals with upside potential are still command- ing cap rates that are below 6.5%. For example, Redwood Realty recently brokered the sale of a 76-unit apartment building in Mount Vernon, N.Y. that sold for $7.5 mil- lion and a cap rate of 6.2%. In the short term, expecta- tions of rising interest rates may fuel activity in the first half of the year. Owners who are thinking of selling may decide to bring properties to market sooner rather than later to capture the best pricing. That added inven- tory would be a welcome addition to a market where there continues to be pent-up demand to acquire multifam- ily property. Thomas McConnel l , CCIM, is a managing partner at Redwood Re- alty Advisors Hasbrouck Heights, N.J. The broker- age and advisory firm fo- cuses exclusively on mul- tifamily assets and repre- sents clients throughout New Jersey and West- chester and Rockland counties in New York. n
ket for the past several years with robust sales volume and aggress ive bidding that have pushed cap rates to record lows. That appe-
Thomas McConnell
tite for apartment assets remains strong, but a higher interest rate environment could be a game charger for both buyers and sellers.
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