Triad compiled sales comparable data on Multifamily investment sales across the Midwest from CoStar and other sources for the past three years. While 2016 was a banner year for sales in many respects, there are some areas for concern. Price metrics per foot and per unit continued to increase and CAP rates compressed again in 2016, down to 6.43% across all multifamily asset classes. Overall, volume was slightly down in 2016 and along with recent increases in treasury yields, there are some signs that 2017 could be a plateau year in pricing.
Class A sales continue to dominate the industry, totaling nearly $2.7 billion in the Midwest in 2016, 38% of the overall market, the highest in three years. Price per unit continued to increase at a more rapid rate than other classes, largely on the back of brand new, urban deals. CAP Rate compression was also most pronounced for Class A with a 31 basis point decrease while other classes stagnated. With 10 Year Treasuries hovering around 2.50%, the highest on average since mid-2014, it’s hard to imagine CAP Rates dipping too much lower in 2017. Rather, Triad predicts CAP Rates to be relatively flat this year unless interest rates unexpectedly rise or fall dramatically.
It’s really a two horse race for most prolific multi-family investment sales market in the Midwest, coming down to Chicago and Minneapolis. Chicago has by far the largest sales volume, averaging over $2.75 billion per year in sales the last three years, yet the Twin Cities boasted the lowest average CAP Rate at just 5.92%. After removing some sample size outliers, markets that saw above average CAP Rate compression include Columbus (104 bps), Minneapolis (88 bps) and Kansas City (81 bps). This seems to reflect to overall narrative that investors are chasing yields into uncharted territory in secondary and perhaps even tertiary markets. Overachievers in price per unit increases (again excluding very small sample sizes) include Detroit (56%), Minneapolis (28%) and Chicago (24%).