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US multifamily and student housing market outlook, Q2 2016

Multifamily

In our latest US research view, we briefly discuss the US multifamily and US student housing market outlook for Q2 2016.


US real estate

Commercial real estate fundamentals remained healthy during the Q2 of 2016 due to ongoing employment growth, modest construction, and low interest rates. Sales of office, industrial, retail, multifamily, and other commercial properties totalled $105bn in Q2 2016, as compared with $122bn in Q2 2015 and $114bn in Q1 2016, as reported by Real Capital Analytics (RCA). The decline in sales volume during the quarter and the first half of the year was attributed to a lack of portfolio sales following particularly strong activity in 2015. Recent financial market volatility, and concern prior to the Brexit vote, likely also gave some investors pause. RCA reported an apparent decline in investor appetite for risk given the profile of the large deals that did occur, as well as fewer transactions with value-add characteristics

Property pricing has, however, generally held up. Green Street Advisors’ Commercial Property Price Index increased 1.9% during Q2 2016 following a 0.6% increase in Q1 2016, and prices have risen 2.5% year-to-date as of June 2016. By comparison, commercial property prices measured by the Moody’s/RCA Commercial Property Price Indices national all-property composite index increased 1.3% year-to-date through May 2016. While commercial property total returns, as reported by the NCREIF Property Index (NPI), moderated in Q2 2016, double-digit four-quarter total returns were recorded for the 23rd consecutive quarter. For the year ending 30 June 2016, NPI total return for all properties was 10.6%, supported by a 4.9% income return and a 5.6% appreciation return. The Q2 2016 total return ticked down to 2.0% from 2.2% during Q1 2016. NPI valuation cap rates remained essentially flat at 5.2% during Q2 2016, while NPI transaction cap rates ticked up to 6.0% during the second quarter, as compared to 5.9% previously. Transaction cap rates, as reported by RCA, held relatively steady at 6.2% during the quarter.

Apartment market

NPI apartment properties produced a 9.7% total return for the year ending 30 June 2016, which consisted of a 4.7% income return and a 4.9% appreciation return. The Q2 2016 total return held relatively steady at 1.9% while NPI valuation cap rates have averaged 4.8% for three consecutive quarters. The apartment sector was the only property type to record a year-over-year increase in sales volume during Q2 2016 when $32.7bn traded hands, a 5% increase over Q2 2015. RCA notes that portfolio transactions increased in the apartment sector during Q2 2016, in stark contrast to the other sectors where such activity has noticeably declined. The average transaction cap rate among apartment properties ticked down to 5.6% from 5.7 previously.

CB Richard Ellis Econometric Advisors (CBRE-EA) reported that the national apartment vacancy rate inched up to 4.4% in Q2 2016 as compared to 4.3% in Q2 2015 (year-over-year comparisons are necessary due to seasonal leasing patterns). The increase in the national vacancy rate, albeit small, was the first since late-2009. Multifamily permit issuance, an indicator of future supply, has started to decline, but construction is not expected to peak until 2017. While apartment demand remains healthy due to favourable demographic trends and steady job growth, more modest improvements in market conditions and rent growth are expected in the latter half of 2016.

Student housing market

RCA reported that sales volume of student housing properties totaled $2.4bn during Q2 2016, which more than doubled volume from Q2 2015. The 12-month moving average transaction cap rate was 5.9% as of June 2016. Student housing fundamentals for the upcoming school year appeared strong during the first half of 2016. New supply, which seems to have peaked in 2014, is expected to remain steady in 2016 and 2017. Axiometrics data count 47,700 new beds are expected to be delivered by Autumn 2016, relatively in line with the amount that was delivered for Autumn 2015. Autumn 2017 completions are estimated at 43,800 new beds, 32% of which are still in the planning stages. As of June 2016, pre-leasing rates were up slightly to 83.4% as compared to 81.9% in June 2015. Effective rent growth is averaging an estimated 2.3% as of June 2016, based on Axiometrics surveys.

 

This article is intended solely for the use of professionals and is not for general public distribution. Any assumptions made or opinions expressed are as of the dates specified or if none at the article date and may change as subsequent conditions vary. In particular, the article has been prepared by reference to current tax and legal considerations that may alter in the future. The article may contain "forward-looking" information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this article is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. COMP201600386

Alice Breheny

Alice Breheny

Global Head of Research

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