Delta: Apartments sales off to strong 2012 start

April 15, 2012

The sale of apartment buildings in the Washington region reached their highest level in three years in 2011, edging 2010 sales volume and far surpassing 2009, when sales reached a trough in the wake of the recession.

While today’s pace still trails the record-setting years leading up to the recession, the numbers are indicative of a healthy market.

In 2011 there were 29 sales of local Class A — or high-end — apartment properties totaling $2.41 billion. Low-rise properties comprised 19 of the sales and mid-/high-rise properties comprised 10 of the sales.

The average per-unit price for 2011 sales was 25 percent higher than 2010 for low-rise units (at $224,000) and 27 percent higher for high-rises (at $423,000).

The Washington market also saw improving returns on the buildings. Total return on apartment investments (cash flow plus appreciation) in the Washington market was the second-highest in the nation in 2011, as tracked by the National Council of Real Estate Investment Fiduciaries. This index reported a 16.84 percent total return, behind only the 18.9 percent return of the Dallas metropolitan area. The U.S. average for the same time period was 15.5 percent.

Outlook for the remainder of 2012

January and February are historically less active for buyers, yet the Washington area saw $82 million in multifamily Class A building sales and another $354 million (three high-rise properties) in pending deals during the first two months of 2012.

More than buildings traded hands. Two land deals totaling $31.3 million also closed in the first two months of 2012, potentially representing more than 700 apartment units. Sales of land for apartments totaled $280 million in all of 2011, bringing the potential for more than 5,600 units.

Currently, most signs point toward continued strength of the sector for the remainder of this year, but some potential head winds warrant caution from investors. The first is an increase in apartment supply from projects currently under construction. The number of new starts in the region last year is the highest since Delta Associates began collecting data. That bump in supply, combined with muted job growth, will likely make conditions in the market more competitive.

Investors may also start looking to put their money to work elsewhere. As other opportunities such as the stock market become more attractive, money that would otherwise flow to real estate could be diverted. But sales should be able to hold their own, given the relative strength of the Washington real estate market.

Steven Reilly is an associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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