The sky is falling, the sky is falling (NOT)

I had a call from an appraiser today inquiring into the details of a sale I recently closed. She said she has heard from several people in the business that CAP rates had increased to as high as 7 on similar deals. The sale she was calling me about was a sub-5 CAP well located 23 unit apartment building.

I asked her if she had any sales that have closed at CAP rates like she was telling me and she said that no, actually, she was confused as to why the sentiment would be that CAP rates had risen so much in the past few months when the sales she was seeing close were actually not much different than last summer. I asked her if maybe her sources were buyers or lenders and she replied that yes, in fact, the people she had talked to were lenders and one buyer.

So here is the thing: if you own an operating apartment building today you are probably fully rented with rents higher than a year ago. Regardless of what the media says you are feeling pretty good about owning that asset. If you weren’t selling last summer and are now a buyer wanna-be, lender wanna-be, or an appraiser tells you that the sales value today is 20% lower than last summer you certainly are not selling today. The point is that the people selling today (and there are 2-4 apartment building sales that close every week lately) are selling for pricing similar to last summer. I guess this defies prevailing wisdom (or really just wishful thinking by a lender who really isn’t actually making any loans on apartment buildings anyway).

Buyers are able to get debt for apartment buildings pretty much the same as a year ago. Rates are up slightly but still in the mid 6% range for fixed rate loans. Well located mid-size apartment buildings always trade at a price with a CAP rate lower than the debt rate (well, at least for the past 22 years). The rental market for apartment has rarely looked better and alternative investments have rarely looked worse.

I haven’t seen any evidence of sales at lower prices but I sure have heard a lot of talk about it. The problem is that it is all talk.