Q2 2017 Apartment Cap Rate Trends

Although the Fed raised its overnight borrowing rate by 25 basis points in December, March and then in June – apartment cap rates have barely registered a change. In fact, the mean apartment cap rate fell 30 basis points in the second quarter to 5.7% from 6.0% in the three prior quarters. The mean 12-month rolling cap rate was unchanged in the quarter.

So why would the cap rate stay flat for three quarters and then fall 30 basis points in the wake of three federal funds rate bumps? Well, as we have cautioned, although cap rates tend to rise with interest rates, the causation is not as direct as the theory would suggest. One could argue that investors look to the apartment market as a safer investment when interest rates climb and this would lower cap rates. This is loosely what we have seen here this past quarter along with the usual selection bias, in that these cap rates reflect the properties that traded in the quarter, and the properties that traded were likely “better” properties in safer submarkets relative to previous quarters. This selection bias has kept cap rates lower throughout the year. Moreover, the lower average cap rate is consistent with the higher effective rent growth we saw this quarter of 1.2% up from 0.3% and 0.4% in the previous two 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 half of 2016 and 2015.

Read the original article here.

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