There were 1,531 small property acquisitions in H1 2019, representing 36.7% of all multifamily asset purchases and revealing the scope of small asset buying. However, this purchase count is conservative since a notable number of transactions were under $2.5 million and therefore not included in the total.

The percentage of small asset purchases in 2019 is on pace to exceed the 35% annual average since 2010. The expected gain is attributable to several factors, including healthy property market fundamentals, investors’ search for new investment opportunities, new buyers entering the market and attractive financing options.

Based on dollar volume, small asset investment seems modest at 7.8% of total multifamily investment in H1 2019. But given the very large total volume of multifamily acquisitions, this percentage is quite significant.

Small multifamily asset investment volume reached a record $14.5 billion in 2018, up by 20.1% from 2017 and well above all previous years tracked by Real Capital Analytics (RCA). In H1 2019, total sales reached $6.4 billion—down 10.1% from the same period in 2018. Aided by lower interest rates, 2019 investment volume should be comparable to the 2016-2018 annual average of $12.8 billion and be the second strongest year for small asset investment volume.

Small asset investment is attractive for many reasons. The size of these assets makes them accessible and operationally manageable to a very large pool of investors (91.6% of investment in H1 2019 was by private buyers). Debt financing has been favorable, with many lenders expanding their small balance lending programs. Market fundamentals remain healthy.

RCA’s historical cap rate data reveals a consistent trend of small asset cap rates being lower than overall multifamily averages. Lower operating costs and the strong appeal of the product—whether for current income or for value-add opportunity—help keep cap rates low. However, a 20-basis- point cap rate increase over the past year likely represents a softening in trades resulting from rent stabilization laws in some markets like New York.

Small multifamily investment is occurring the most in gateway markets. Nearly two-thirds of investment by dollar volume over the past four years was for assets in New York City, Los Angeles and San Francisco. Most small asset investment also is in older neighborhoods, many of which are undergoing significant gentrification and redevelopment—certainly a driver of steady investor interest.