Groton Estates LLC recently bought the Colonial Manor apartment complex in Groton from Colonial Manor Assoc. for $13.39 million. The deal was brokered by New Haven-based Marcus & Millichap Real Estate Investment Brokerage Co.

Having taken a look back at statewide apartment sales for 2002, industry analysts are predicting that 2003 will be a banner year.

“It’s clear that both institutional and private investors have sought apartment investments as a safe haven,” said Steve Whitten, senior director of Marcus & Millichap’s National Multi Housing Group. “This is the one area that’s yielding the greatest return, as compared to alternative types of real estate and alternative types of investment.”

Marcus & Millichap reports that the majority of buyers for 2002 were from the private sector. The largest transaction in Connecticut, a 306-unit complex in Stamford, was purchased by an institutional investor. However, most of the 37 other sales were from private investors.

The 38 sales totaled just over $169 million, compared to 29 sales in 2001 with a total sales volume of about $194.6 million – a total decrease in the sales volume of 13 percent. There were 2,937 units traded last year as compared to 3,318 traded in 2001.

The average square-foot value remains relatively stable at $64.99, vs. $51.85 in 2000 and $65.70 in 2001.

Per-unit sales are stable as well. In 2002, sales averaged $57,554 per unit, compared to $58,626 in 2001 and $48,892 in 2000.

Such numbers can be deceptive, however, as analysts were quick to point out that there are three major apartment complex transactions either recently completed or pending completion that will have an effect on the per-unit and per-square-foot values.

One of the transactions, a 165-unit luxury facility in East Haven, closed at the end of January. The other two will represent roughly 800 units and have yet to close.

During the last three years, per-unit values have been growing steadily, and 2003 is “off to an exceptionally strong start,” according to Whitten. “We’ll undoubtedly exceed the last five years in the number of total units sold this year.

“What’s really happened is that both private and institutional investors are becoming more aggressive and buying some of the stock of larger luxury units. As these sales continue, they’ll push values up dramatically in 2003.”

Whitten added that since capitalization rates have dropped, property values have risen proportionally.

‘Huge Demand’

Craig Fuchs, manager of H. Pearce Real Estate Co.’s Industrial and Commercial division, relates the high cost of apartment units to the current low interest rates.

“Generally speaking, commercial property prices will vary inversely with interest rates. As rates lower, acquisition prices increase,” he said. “If certain elements of the cost are decreased, then the seller is going to increase other elements and command a higher price.”

He added that the rental market is still very tight, stressing, “Demand far exceeds supply from an investor’s perspective.”

The equity market in general has been so wildly fluctuating that investment dollars are trying to find alternatives, according to both Fuchs and Whitten. One area of investment that is perceived to have a high return for a relatively low level of risk is the apartment market.

“The risk-adjusted returns are attractive, so there are a lot of those investment dollars seeking very few properties,” said Fuchs.

One reason for the lack of supply is that current owners are forced to deal with the same few alternatives if they decide to sell, and therefore appear to be hanging on to their properties.

Also, new construction is at a relative minimum.

Multifamily housing permits totaled 1,010 units in 2002, which is down from the 1,117 units in 2001. Permits in Fairfield County dropped most dramatically, from 631 units in 2001 to only 193 units in 2002. Hartford County saw the most dramatic increase, from 166 units in 2001 to 337 units last year.

A multifamily unit is defined as one having five units or more.

Whitten cited a “cyclical glitch” in occupancy rates, most of which is in Luxury Class A apartments in some suburban markets in New Haven, Fairfield and New London counties, but is most prominent in Fairfield where the rental structure is highest.

Basically, single-family mortgage rates are low, and that has spurred buying. Typically, those who rent luxury apartments are renters by choice. In many cases, said Whitten, those people can afford to buy homes – and now, with low interest rates, they have chosen to do just that.

Whitten predicted that in 2003 concessions will drop and occupancy will stabilize.

“We’re already starting to see vacancy recede – less in Fairfield County, but certainly in Hartford and New Haven counties. Occupancy is starting to increase nicely,” said Whitten.

“Pricing is just going up and up,” said Ray Baldelli, a residential agent with H. Pearce specializing in multifamily units. He said there is still a lack of units on the market, and in New Haven especially there is a significant lack of single-family and condo units on the market.

“A lot of the people who would be buying single-family homes are buying multi-unit homes and either tolerating tenants or converting them back to living space,” said Baldelli. “There is simply not enough supply to meet the demand.”

He added that 2003 will be a great year for developers because there is enough demand that a new apartment should be absorbed quickly, especially it it’s a luxury unit. “Whoever has something to sell is going to be very happy,” said Baldelli.

A trend going on throughout the Northeast, where the predominant amount of apartment stock is older, is the renovation of garden-style and mid-rise buildings.

“A lot of these buildings are from the late 1960s and early ’70s, and they’re now being repositioned to be more competitive,” said Whitten. “They’re still below Luxury [Class] A units, but they’re the strongest product type in New England.”

While numbers are still being budgeted, Whitten said 2003 will see a rental increase of about 3 percent.

“There are certain aspects where there may be stability at best, but since a lot of the product has been repositioned the rates are going to go up,” said Whitten.

Whitten predicted that 2003 will “dramatically surpass 2002 in total sales volume, noting that capitalization rates have been steadily decreasing during the past year and that a current lack of new supply will keep the market competitive.

Fuchs said he foresees 2003 generally following the same trends.

“I don’t see anything changing the current market,” said Fuchs. “On one hand, you’d think that the rental market would deteriorate because renters are converting to homebuyers as a result of low interest rates. But I don’t think that has mitigated demand for rental space … There is still huge demand.”