Apartment Sales Volume Down

The level of distress among apartment sellers is increasing rapidly, according to the latest Capital Trends Monthly report on the apartment sector, released by Real Capital Analytics (RCA). The continuing effects of the collapsed condo conversion market have elevated levels of distress since 2006, but the recent spike indicates that financial troubles beyond the failed conversions are starting to emerge. Over eight percent of recent apartment sales can be linked to a distressed seller, and this percentage has quadrupled over the past year.

By dollar volume, distressed apartment sales have ranged between four percent and six percent for much of the past year and peaked at just under 10 percent in fourth quarter of 2007. Recent trends indicate that a greater number of smaller properties are facing trouble. By either measure, the distressed sales are well above reported mortgage delinquency rates and indicate that pressure among all sellers is growing, according to the report.

Even so, the sales volume as well as number of sales in the apartment sector are both down by more than 50 percent. In the past 12 months, 4,430 apartment properties have been sold nationally, equaling $115.53 billion.

In fact, cap rates for closed deals ticked up slightly to over 6.5 percent while asking cap rates averaged 6.2 percent, underscoring the large gap in pricing that separates buyers and sellers, according to the RCA report. Meanwhile, the volume of apartment properties listed for sale exceeded closings again in August. Year-to-date, offerings have exceeded closings by a ratio of 1.5-to-1 nationally and are rising. The oversupply of property offerings in tertiary markets is even greater, although large inventories of properties for sale have recently started accumulating in primary and secondary markets as well, the RCA report finds.

At the beginning of September, closed sales in the third quarter totaled $4.5 billion, with another $6.5 billion reported in contract and the market was on pace to easily exceed the $9.3 billion in transactions recorded in the second quarter, according to this report. However, the uncertainty surrounding the takeover of Fannie Mae and Freddie Mac, followed by even greater upheaval on Wall Street has stalled the market. Reports are already surfacing of another wave of deals delayed, re-traded or called off. Sellers are also shocked and the seasonal surge in offerings that is typical each September has been modest.