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Increased investor demand, coupled with low mortgage interest rates, led to compression in cap rates from 6.16% in August 2012, to an average of 5.45% for sales closed by mid-August 2013. However, sales volume was somewhat moderated by Seller price expectations. We continue to see properties being offered for sale at cap rates well below threshold returns targeted by savvy Buyers. Cap rates typically vary based on the age, condition and location of the property. VC sales ranged from a 3.9% Cap Rate for a beach-neighborhood property, to 7.4% for an older collection of duplexes and bungalows that needed work. Eighty percent of the properties traded at cap rates of 5% or more.
The majority of transactions this year have been small buildings of 5-12 units; with only four sales of larger buildings. A 400 Unit complex in Ventura closed for $72,800,000 in February. An 85-unit transaction in Oxnard, with a reported cap rate of 5.75%, was part of a portfolio of properties that included buildings outside of the county.
From a National perspective, over the past few quarters secondary and tertiary markets have begun to outperform primary markets with regards to effective rent growth. This trend is expected to continue for the next year, driving yield seeking investors into non-primary markets. Ventura County has benefitted from this trend, as many of this year’s transactions were purchased by out of town investors.
While apartment construction is booming across the nation, net absorption is not expected to be a problem. According to “The Sate of the Nation’s Housing 2013” overall supply is in line with demand for rental housing. After the virtual shutdown in apartment development in 2009, deliveries of new units dropped to the lowest levels on record in 2010 & 2011. Completions rose by 22% last year, to a total of 158,100 units; only about half of the level that is needed to meet demand. With over 65 million Echo Boomers ages 20-34 entering the prime renter cohort the number of U.S. households grew by 980,000 in 2012, up drastically from 600,000/year average of the past 5 years.
It may be the right time to sell in 2014 for owners who have been waiting for the “sweet spot” in the market. As investor enthusiasm remains very strong, and the number of buyers continues to far outweigh sellers, we expect the current trends to continue into next year. However, rising mortgage interest rates; slow and uneven employment growth; and continued recovery of the housing market, combined with perceived competitive risk from newly constructed units, will moderate price appreciation by putting downward pressure on Cap Rates.
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All information provided herein is from sources deemed to be reliable, but no guarantee or warranty is stated or implied.
Copyright 2014 Dyer Sheehan Group, Inc.