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Buying apartment properties in core markets is no longer enough for multifamily REITs. These companies are expected to slow their acquisitions of individual properties this year.

“I think you’re going to see them becoming more neutral or even becoming net sellers,” says Dan Fasulo, managing director with Real Capital Analytics, a New York City-based research firm.

REITs can no longer count on apartment building values to rise through the roof because prices have risen so far already. To find yield, apartment REITs are pursuing other strategies, including mergers or portfolio purchases that may produce new value for their investors.

The volume of multifamily sales is still high and rising, but many of these apartment properties are now traded as part of larger portfolios or through mergers between companies. Sales of individual properties declined in 2013, including a 13 percent drop in the fourth quarter, according to RCA.

During the early recovery from the crash, many of the leading buyers of apartment properties were REITs. Because they can raise capital through the stock markets, REITs were able to gather the money to buy properties before many other types of buyers who needed to find acquisition financing from lenders.

In 2013, REITs continued to buy more properties than they sold in core apartment markets. Publicly-traded REITs bought $5.2 billion in apartment properties in Washington, D.C. last year, more than REITs bought in any other market. REITs also sold $1.5 billion in properties in D.C. that year – more than they sold anywhere else.

Los Angeles, New York City, San Francisco, Boston, and Seattle rounded out the top six markets where REITs bought apartment assets in 2013, according to a tally kept by RCA. Other top areas for REIT sales in 2013 included secondary markets like Atlanta, Orlando, Dallas, and San Diego.

Dried up wells

But REITs might not be able to squeeze much yield from high-priced core markets anymore. Many apartment buildings in those markets have totally recovered the value lost during the downturn and then some. Last year, average multifamily prices ended up 5 percent above their peak levels, according to the RCA Commercial Property Price Index. Property values in Manhattan are now at record highs, at 150 percent of their peak in 2007.

That puts apartments much further along in the business cycle than other property types, like office, industrial, retail and hotels. Those types of assets are still selling for at least 10 percent less than their peak levels.

That creates a challenge for apartment REITs. There is less room for apartment prices to rise. The RCA CPPI rose 12 percent in 2013. That’s impressive until you compare it to other property types. The indices for retail, office, and hotel properties all rose much more quickly last year. Average capitalization rates for apartment properties, which represent income from properties as a percentage of the sales price, were lower at 6.2 percent in 2013 for apartments than any other major property type, but apartment cap rates have started to rise, inching up 4 basis points.

“REITs have become increasingly creative to add value,” says Fasulo.

One strategy is to merge. In October 2013, Colonial Properties Trust and MAA completed their merger, creating “the pre-eminent Sunbelt-focused multifamily REIT,” according to a statement from MAA. The new, enlarged MAA is an $8.3 billion company, with 85,000 apartment units in its portfolio. The strategy will save the combined company $25 million a year from “the elimination of duplicative costs,” according to the statement.

This article was republished with permission from National Real Estate Investor.