In our last issue, we reviewed some of the alternative perspectives concerning the direction of the multifamily marketplace, as some observers remain optimistic, while others are posturing for impending doom. The first half of 2010 has revealed some interesting results regarding apartment fundamentals, particularly with regards to the capitalization rates that have emerged from recent transactions. Thus far in 2010, we have seen a fair amount of cap rate compression driven by the eagerness and volume of investor pools. In this issue, we offer our current observations regarding the market, particularly cap rate revelations, and we again present our Multifamily Cap Rate Report for Q2 2010.

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Recovery and transaction activity in the national investment market for multifamily assets and notes has not been nearly as swift or as strong as some experts predicted at the beginning of the year. Offerings of quality multifamily assets and notes have attracted multiple bidders and secured premium prices in the first half of 2010, with investors having an especially keen appetite for institutional-grade assets and notes in attractive coastal markets. Rents and vacancies in better areas are showing some firming with the exception of Arizona where the tougher stance on illegal immigrants has caused renewed downward spiraling of occupancy numbers and increase in overall turnover of the units within each site. Indeed, one owner reported that in the past 30 days, his vacancy rate is up at least 5% and the turnover has moved from 65% annually to 100%.

Multifamily Through the first six months of 2010, $11.6 billion in multifamily property traded hands, up from $7.7 billion in the first half of last year. Dollar volume for all of 2010 may ultimately show as much as 15% increase over 2009. It is interesting to note that this represents a 43% drop from 2008 and a 75% drop from 2007. sales are largely divided according to the asset quality (i.e. class, age and location). High-quality performing multifamily assets and notes for sale are most sought after and as usual have the lowest capitalization rates. Cap rate compression from Q1 to Q2 is likely about .25 points for Class A assets and notes. The gap to the next grade of property is surprising, as the appetite for Class B and lower grade assets is demanding large differences from Class A brethren by every valuation measure.

Most investors coming in now are seeking A grade assets at real rates of return, however some are looking at new supply and replacement cost and placing their bets based upon discount to replacement cost as their strike price, irrespective of financial operations of the asset.

Buyers in general are assuming they are going to see hefty rent increases and continued demand recovery due to the shutdown of the supply pipeline and the improving economy.