Fueled by competition among institutional investors, pricing for core multifamily assets surpassed property fundamentals in 2010, according to the
Marcus & Millichap 2011 National Apartment Report. Strong demand, rising rents, and improving occupancies are expected to continue to support pricing this year, which may spur more sales of class B properties and greater activity among private and opportunistic investors in search of stronger yields in secondary and tertiary markets. The effects of yield compression and a limited inventory of top-tier assets will become clearer as the year progresses, the report notes.
Secondary and tertiary market capitalization rates were 100 basis points and 200 basis points higher, respectively, than primary market cap rates in 4Q10. Unfinished multifamily projects also are expected to receive attention from investors this year thanks to a lack of new construction and a positive demand-side outlook.
Overall, the outlook for multifamily investment this year is strong. Though still well short of peak levels, transaction volume is expected to build on last year’s momentum, which culminated in approximately $40 billion in sales, a 65 percent increase from the market low in 2009. Approximately 80 percent of these transactions were valued at $10 million or less, indicating healthy activity among private buyers, but real estate investment trusts and institutional investors will increase their share of transactions this year.
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