Q3 Apartment Cap Rate Trends

December 1, 2017

Barbara Denham on Nov 28, 2017

Not only has the Fed raised its overnight borrowing rate by 25 basis points three times in the last year, but the market highly expects it to do so again in December. Nevertheless, Apartment sector cap rates continued to decline in the third quarter of 2017. In fact, the mean Apartment cap rate fell to 5.8% from 5.9% last quarter.  The mean cap rate is as low as it was in early 2016 before the Fed started to raise rates. The 12-month rolling cap rate fell 10 basis points to 5.9% in the quarter.

 

This continued pattern of low Apartment cap rates is indicative of the healthy investor demand for Apartment properties. These low rates have defied the three Fed funds rate bumps, but as we will see when we look at interest rates, a number of other variables have defied the Fed funds rate as well. And as we have mentioned in the past, although cap rates tend to rise with interest rates, the causation is not as direct as the theory would suggest. In the current investment climate, investors continued to view the Apartment market as a safe investment. This has kept Apartment cap rates low.

 

And we do caution, as we do every quarter, that the data is subject to selection bias, in that these cap rates reflect the properties that traded in the quarter, and the properties that traded could be “better” properties in safer submarkets relative to previous quarters.

 

One could argue that selection bias has kept cap rates lower throughout the year. Moreover, this lower average cap rate is consistent with the healthy effective rent growth we saw this quarter of 0.9% up from an average quarterly growth rate of 0.8% in the three previous quarters.

 

We should note that although transaction volume increased slightly in the quarter, year-to-date sales volume in the Apartment market trails that seen in the first three quarters of 2016 and 2015. Thus lower volume could suggest that the only properties trading are those that the sellers are “getting” the prices they want for them.

 

 

 

 

 

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