Institutional investors bidding on smaller and smaller buildings

Anyone interested in residential, if not commercial, real estate over the past couple of years knows the big plays have been in the multifamily sector.

The reasons are fairly obvious. During the boom years, the flood of easy money into single-family homes left the apartment sector on the sidelines. Then came the recession and multifamily was starved for new development capital. The end result was a shortage of new multifamily projects just as the need for rentals began to lift in a big way — not only from folks who lost their homes during the recession but from young people who were finally making enough money to move into their first rental situation.

A couple of data points: According to the Census Bureau, apartment building starts were trending toward 229,000 units this year, a substantial improvement over the 100,000 to 167,000 units built from 2009 to 2011; and the Survey of Market Absorption of Apartments reports second-quarter, three-month, absorption rates for multifamily rentals increased 61 percent after falling to 56 percent during the first quarter of 2012.

For the past three years, capital returned to the multifamily sector, not only for new building, but investment dollars as well. Indeed, institutional investment in the sector has been so rampant that capitalization rates (ratio between net operating income and capital cost) have dropped into the 5 percent to 6 percent range.

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