Commercial Real Estate

Multifamily Investment, Leasing Fundamentals Off to Solid Start

Investor interest in U.S. properties continued at a healthy clip at the beginning of 2011, as investment sales multifamily dollar volume jumped 40% in the first quarter over the same period last year. More sales of apartment buildings closed in the first quarter of 2011 than in any quarter since mid-2005, according to CoStar Group data.

Just under 4,000 commercial property sales transactions were recorded in the quarter at a total volume of $9.4 billion, according to preliminary CoStar sales data, compared with $6.7 billion in first-quarter 2010 and just $3.76 billion in first-quarter 2009.

While leasing fundamentals are no longer improving at last year's torrid pace, investor interest by all accounts remained sharp for apartment buildings for sale. Renter demand for apartment space for rent remained solid in the first quarter, as the supply of new units continued to dwindle and the national apartment vacancy rate fell to 7.4%, a decline of 100 basis points since late 2009.

Despite an uneven economic expansion, the recovering economy remains is good news for commercial real estate and good news for apartment demand. Investor appetite for newer institutional-grade product in high-barrier, coastal markets is driving sales volume in recent quarters, unlike in 2008 and 2009, when larger transactions were difficult to finance and the limited pool of mostly local investors opted for smaller properties in suburban locations.

REITs and private equity firms were the dominant net buyers of commercial properties in the first quarter. REITs purchased a total of $515 million in the quarter, with $130 million in net purchases after subtracting dispositions. Private equity player netted $117 million in sales, an amount expected rise into 2012. Institutions were the largest apartment sellers, disposing of a net $354 million in assets.

Washington, D.C. and Los Angeles logged the highest year-to-date sales volume at $900 million each, followed by the San Francisco Bay Area ($600 million), Phoenix ($500 million) and Long Island ($400 million). The top five multifamily markets accounted for $3.3 billion, about 35% of the $9.4 billion in total sales volume. Collectively, those top markets saw a 15% year-over-year increase in the first quarter.

Distressed transactions, including REO sales, deeds in lieu of foreclosure and properties with high vacancy and/or deferred maintenance costs, accounted for about 21% of all multifamily sales volume in the first quarter. In housing-exposed markets like Tucson, AZ, Fresno, CA, Jacksonville, Las Vegas and Atlanta, distressed trades exceeded 60% of all transactions. Supply constrained markets like Boston, Marin/Sonoma counties, CA; San Diego, Northern New Jersey, Portland, Washington, D.C. and San Jose, CA showed distressed levels of 20% or less.

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