Patriot Games
Improving fundamentals and the condo conversion trend prompted more apartment sellers to join in the deal-making game during the past year. The sale of Towers at North Point to a condo converter for $334,000 per unit set the pace for investments in 2004. Although numerous buyers were active in the market during 2004, the median price declined slightly. Despite a few high-end purchases in Cambridge by the likes of Equity Residential and Crescent Heights Investors, the median price fell due to the predominance of sales in the lower end of the market.
Looking forward, the number of institutional-grade apartment properties sold will have increased by the end of this year as operations in the Class A segment continue to improve. The outlying suburban areas are the best bet for opportunistic investors, as vacancy is still relatively high and rents are just starting to stabilize. The median sales price for the metro area is expected to reach $120,833 per unit, an 8 percent increase over last year. Cap rates for properties of 40 or more units typically range from 5 percent to 9 percent. The median rate was 6.7 percent last year, with Class A properties trading at 6.2 percent or lower.
Although Boston has a strong apartment construction pipeline and is in the early stages of economic recovery, the market remains above average when compared to other metros for apartment owners and investors. Boston’s low housing affordability and relatively low vacancy bode well for its investment future.
Soaring Stocks
NAHB’s apartment index sees another strong performance.
Proving the power of the multifamily industry, the Multifamily Stock Index (MFSI) has been beating the S&P 500 by more than 130 percent, according to Elliot Eisenberg, a housing policy economist at NAHB who created the MFSI. The index hit its second-highest level ever in September.
“The S&P 500, with stocks reinvested, is up about 11 percent [in the past six years], whereas the MFSI is up 155 percent,” says Eisenberg, who began tracking the MFSI in December 1998. After a small dip in August, the stocks bounced back strongly in September, rising by 48 points to 2,554–a 26 percent jump from September 2004.
All of the stocks included in the MFSI have to earn at least 50 percent of their income from rental transactions, and most earn substantially more than that. Of the 27 publicly traded companies currently included in the MFSI, 24 or 25 are REITs, Eisenberg says.
“This index doesn’t capture all rental companies–some aren’t public–but it does include a lot, and it is a good measure of health,” Eisenberg notes.
Though MFSI stocks were on par with the S&P 500 (with stocks reinvested) at its inception in 1998, the multifamily stocks have taken off since then and never looked back. “The S&Ps have had a very good run, and my returns [on the MFSI] have consistently done better,” Eisenberg says.
The question is, how long will this outpacing trend continue? Even Eisenberg can’t say for sure.