The apartment market in the Pennsylvania, New Jersey and Delaware Tri-State area remains extremely strong with no signs of slowing down in the immediate future. There are numerous reasons for this historically high demand and volume of transactions. The first is the low interest rate environment that remains in place. The 10 year T-Bill, which is the driving factor for interest rates, is close to a historical low; on 2.29.2016 it was as low as 1.75%. As long as there is no significant jump, we will continue to see significantly low rates in place for borrowers. This in turn helps sellers achieve “top of the market” pricing as interest rates and cap rates are highly correlated with one another. “With borrowers obtaining 100-150 bps spreads between their interest rate and cap rate, deals are making sense compared to alternative investments,” said Mark Duszak, a director at Rittenhouse Realty Advisors (RRA). The lower the cap rate, the higher the price sellers are able to obtain.
“This is the main reason why we have been seeing historically high prices per unit in the Tri-State area,” said Ken Wellar, a managing partner at RRA.
Another reason we are seeing high demand for apartments is that there is a lack of supply being offered for sale. With these low interest rates, it would be expected that more product type would be changing hands, but that is not the case. The majority of the product in the area, specifically the Philadelphia MSA, is owned by family owned private capital operators. Historically this buyer pool has been less likely to sell when compared to “institutional” investors as they are building their portfolios for future generations, rather than holding for a certain time period and then selling to meet investor required action items. Although institutional investors are showing increasing interest in the Philadelphia and surrounding markets, it is and has historically been a private capital market. There is also an increased demand for apartment properties due to the fact that the buyer pool is getting larger and larger.
“People are scared of the stock market. We are seeing more and more investors taking their money out of their retirement accounts and investing in multi-family,” said Corey Lonberger, a managing partner at RRA. “Our team focuses on multi-family private capital deals throughout the Mid-Atlantic region. We have closed on over 95 apartment transactions totaling almost $350,000,000 in total consideration since opening the doors three years ago.”When you look at these three factors it is easy to see why the demand for apartment properties in the Tri-State area is so high. With this being an election year, along with the struggling stock market, we do not expect that the Federal Reserve will be doing any drastic increases to rates anytime soon. If rates stay low and the buyer pool continues to grow, simple economics tells us that the apartment market in this area will remain strong for the immediate future.
Based in Philadelphia, Pennsylvania, Rittenhouse Realty Advisors is a real estate advisory firm with an extensive focus in the brokerage of multi-family communities throughout the northeast region of the United States. Formed in February 2013 by a group of advisors with more than 30 years of commercial investment sales experience, our focus is on multi-family and mixed-use properties with significant residential components.