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US multifamily and student housing market view, Q3 2016

Student housing

Our latest research view looks at the US multifamily and US student housing market for Q3 2016.

US real estate
Commercial real estate market fundamentals were healthy during Q3 2016 amid an economic environment that is 'strong enough' to support steady or improving market conditions across most property types. Construction has recently increased and the pipeline bears watching, but remains generally moderate due to stricter financing requirements. Data from CB Richard Ellis Econometric Advisors (CBRE-EA) indicate that metro market supply-demand fundamentals are generally well-balanced, with the possible exception of the apartment market where new supply is beginning to impact market conditions. Real Capital Analytics (RCA) reported that sales of commercial properties totalled $111bn in Q3 2016, nearly identical to Q3 2015's volume. RCA attributes much of the moderation in sales volume during the year to fewer portfolio sales following particularly strong such activity in 2015.

Green Street Advisors’ Commercial Property Price Index (CPPI) increased 0.6% during Q3 2016 and is up 5.0% over the prior year. By comparison, the Moody’s/RCA Commercial Property Price Index increased 1.1% in the month of August; CBD office properties contributed to the increase. Over the past one-year period, the Moody’s/RCA CPPI has increased 8.2%. While property prices are still increasing, the pace appears to be moderating during 2016. Commercial property returns were positive for the 27th consecutive quarter in Q3 2016. The NCREIF Property Index (NPI) total return was 1.77% in Q3 2016 as compared to a total return of 2.03% in Q2. This marked the lowest quarterly total return since 2010 and was largely due to moderation in the appreciation component, which was 0.6% during the quarter. For the year ending 30 September 2016, NPI total return for all properties was 9.2%, ending a streak of 23 quarters with double-digit one-year returns. The one-year total return consisted of a 4.8% income return and 4.3% appreciation return. NPI valuation cap rates ticked down to an average 5.1% during Q3 2016 as compared to 5.2% during Q2, while NPI transaction cap rates drifted up to average 6.1% from 6.0% previously. Transaction cap rates as reported by RCA ticked down to 6.0% during Q3 from 6.1% previously.

Apartment market
For the year-ending 30 September, 2016, NPI apartment properties produced an 8.5% total return, which was supported by a 4.6% income return and 3.7% appreciation return. The Q3 total return declined to 1.7% from 1.9% during Q2. After holding steady at 4.8% for three consecutive quarters, the NPI apartment valuation cap rate tightened, ending Q3 at 4.7%. Investor interest in the apartment market remained strong during the third quarter when transaction volume totaled $36.8bn, a 7% increase compared to Q3 2015. Sales of garden apartments increased, perhaps reflective of a relatively strong increase in sales in tertiary markets. The average transaction cap rate as reported by RCA declined to an average 5.4% during Q3 from 5.7% previously. Apartment demand is generated from a combination of economic, demographic and socio-economic factors including job growth, household formations, and trends in the US homeownership rate. Supply pressures contributed to a rise in the national vacancy rate to 4.5% in Q3 2016 from 4.3% in Q2 2015. Rent growth remained positive, but is moderating in response to new supply. Completions are not expected to peak until 2017. While apartment demand remains healthy due to favourable demographic trends such as increasing household formation and steady job growth, more modest improvements in market conditions and rent growth are expected in the near term.

Student housing market
After two consecutive quarters of transaction activity approaching the $3bn mark, sales of student housing properties totalled $1.4bn during Q3 2016, which still represented a 36% increase over the Q3 2015 volume. Transaction cap rates increased to average 5.8% during the quarter from 5.4% previously. Despite the increase, average quarterly cap rates have been below 6.0% every quarter in 2016, marking the lowest cap rates in RCA history. New supply continues to deliver in the student housing sector. Axiometrics reports that 44,000 beds delivered for the start of the 2016-2017 school year, and an additional 3,800 are still underway with expected near-term completions. An uptick in supply appears likely for the 2017-2018 school year, with a preliminary estimate of 45,700 beds expected to deliver. Leasing activity began to moderate during the summer, but is reportedly still considered strong relative to previous years with effective rents up 2.3% over Autumn 2015 levels.

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. COMP201600457