Developers increase investment options. Two of the largest concerns in the apartment investment community over the last few years have been the large amount of capital unable to find acquisition assets and overbuilding in the top investment markets. Now it appears that what was once considered a problem has become one of the solutions for deploying capital. From 2015 to 2017, developers completed almost 1 million new apartments. There was concern that supply would overwhelm demand and crush the strong fundamentals being witnessed in the apartment market. That has not happened. Vacancy nationally in the second quarter 2018 stood at almost the same rate as the corresponding period in 2015: 4.6 percent. With market fundamentals remaining solid, cap rates have remained level, supporting asset valuations. Developers have taken notice of valuations remaining stable and begun to put newly completed projects on the disposition table. Investment capital has responded positively to the increased availability of for-sale assets, especially new, well-located properties in high-density urban or suburban transit-oriented development/town-center locations. The deep pool of newly built properties offers core and core-plus buyers the most acquisition options they have seen in a number of years and should help maintain an elevated $20 million-plus transaction market for the reminder of the year.
Midsize metros gaining capital from yield-seeking investors. Another increasingly used strategy for capital deployment has been investing in secondary markets. For investors seeking higher yield at the start of the expansion, the value-add strategy in primary markets became popular. So popular, in fact, that value-add opportunities have dwindled significantly. With limited value-add properties to purchase, these yield-seeking investors slowly started seeing the potential of secondary markets, especially those with limited to no new supply additions and with rent growth above the national rate. In some cases investors are able to purchase newer properties in secondary markets at cap rates higher than value-add properties in primary markets without the renovation risk. The increased capital flowing into secondary markets has pushed down cap rates almost 70 basis points in the past three years for sales above $20 million. However, cap rates in secondary markets remain above those in primary markets and sales volume for the $20 million-plus segment over the past four quarters has risen 11 percent, reflecting investor interest in capitalizing on the higher yields that can be secured.