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September 13, 2013

Sophomore blues: Big student housing player slumps

By Zac Bissonnette, Special to 

About a year ago, the real estate investment trust American Campus Communities acquired The Vue—a 468-bed apartment complex across the street from Arizona State University in Tempe.


In a press release announcing the acquisition, CEO Bill Bayless said that the complex demonstrates "our investment criteria of differentiated products in close proximity to campus in submarkets with high barriers to entry."


The Vue was indeed a differentiated product—but not in the way Bayless wanted it to be. In the years leading up to ACC's acquisition, Arizona State students referred to the property as "Club Vue." YouTube videos circa-2010 documented the bare-chested, bare-knuckled "Vue Fight Club" events taking place in the complex's pool while hundreds of onlookers cheered "A-S-U! A-S-U!" The videos attracted more than 100,000 views.


What's more, the Vue was a recurring character in the police blotter. In one raid in 2009, 85 people were arrested. The complex's tarnished reputation was destroying its income-producing potential.


By the time ACC acquired it, occupancy had dwindled to 58 percent. A week after the deal closed, the new manager sent a letter to all its residents informing them that the jig was up, underscoring that ACC would not tolerate unlawful behavior and evictions would be swift.


Only seven "Club Vue" residents returned the next year as ACC quickly rebranded the Vue as 922 Place. In new hands, occupancy soon soared to 97 percent after ACC decided to cut rents by 12 percent.


It was the latest victory in a long run of victories for American Campus Communities—the largest and, analysts say, best managed among the three student housing REITs in the country. But this year, for the first time ever, ACC is struggling. Its shares are down 28 percent versus a decline of 3 percent for the Vanguard REIT Index ETF.


The problem: Investors are nervous about a glut of student housing and the possibility that college enrollments start to decline at the more expensive schools.


Can Bayless get his 123,000-bed, $5 billion business back on track?


Bayless has been restoring order at dorms since he was a resident advisor while studying business at West Virginia University in 1984. He co-founded ACC in 1993. "In the mid-80s you started to see the evolution of students wanting more consumer-based housing products," said Bayless, who describes himself as the "son of a poor steelworker."

"That was when I first saw the opportunity from a product evolution perspective," he added.


The product evolution Bayless saw was the rising demand for high-frills student housing to replace the barracks-style quarters that housed the baby boomers in their college years.


ACC has built, bought and operated, sometimes on-campus and sometimes off-, student housing complexes that include amenities few students will be able to afford post-college. High-end fitness centers are the company's trademark, but some of its properties also include tanning beds, theaters, basketball courts and coffee bars.


During the housing bust, ACC was one of a handful of REITs that reported same-store sales growth in occupancy, rental rates and net operating income, and few housing stocks outperformed ACC shares during those years.


This year, however, it's a different story. In July, the company reported just its second quarterly decline in same-store net operating income since its 2004 IPO. Higher-than-expected marketing costs outpaced higher-than-expected revenues, and the company announced that it expected its fall semester same-store occupancy would be between 95.5 percent and 98.5 percent—possibly lower than the 96.8 percent the company achieved in fall 2012.


A recent Wall Street Journal piece pointed to possible problems for the company and the industry at large. Where student housing was once a niche largely ignored by major real estate developers. More than 50,000 off-campus apartments have been built so far in 2013—a record high at a time when for the first time in decades, college enrollment is slowing as the peak of the echo boom generation is now out of college.


Wounded by the housing bust, real estate developers looked for safe havens—and recession-resistant student housing, with its stable demand and parents to co-sign leases, was one of the places they poured money.


Most analysts agree that ACC is still the best operator in student housing—but the niche isn't as niche as it was. Many developers, Bayless said, have built too many units at too high price points; "We build for the masses, not the classes," he said.

ACC is "facing well-below average growth," in comparison to its past, said Dave Bragg, a managing director with Green Street Advisors, a commercial real estate firm. "Investors are adjusting their expectations."


In a recent client note, Baird Equity Research contended that "the downward spiral YTD in the student housing stocks is overdone, in our view, having been driven not by facts but by misperception that fundamentals are deteriorating."

The near-term outlook for the industry, however, seems less bright than it did a few years ago: College enrollment fell 2 percent for the 2012-13 school year, but nearly all of that decline came at community colleges and for-profit colleges, where a stronger job market lured away would-be adult students.


Bragg also said that, long term, growth in online learning could hurt demand for off-campus housing—although that hasn't happened yet. Tales about declining enrollment are beginning to make news in the higher education press but, perhaps surprisingly, the demographic shift isn't even on Bayless' radar.


"It really has not been a driver for us," he said. "At your large tier-1 public universities, there's still so much demand." Any downward shift in enrollment, he said, will likely hit expensive private colleges as price-conscious, debt-averse consumers seek lowest-cost public universities.


During the recession, he said, that trade-down helped ACC as some families talked their kids into attending affordable in-state universities while sweetening the pot with the offer of posh housing. In markets that have seen construction growing faster than enrollment, Bayless said, the occupancy hits have usually been taken by the small-time slumlords.


"The University of Texas at Austin has historically been right around 50,000 students," he said. "Enrollment has been steady; it hasn't been going up, it hasn't been going down. Over the last 12 to 15 years, 15,000 beds have been developed, but it's all been absorbed. Who has gotten pushed out of the markets? The landlords that didn't offer good service and product and value."


BOMA sees decline in Office operating expenses


A decrease in rental income has contributed to office building owners and managers trying to lower their operating expenses, according to a report released by the Building Owners and Managers Association (BOMA).


The association’s annual report on  operating costs in commercial real estate markets in the United States, released Aug. 27,  showed that there was a 3.9 percent overall decrease in total operating expenses for office buildings from 2011 to 2012. At the same time, the average rental income for office buildings dropped 2.9 percent from 2011 to 2012.


BOMA noted that building owners and managers are compensating for the rental income losses with greater reductions in spending on operating expenses.  Operating expenses incurred include utilities, repairs and maintenance, roads and grounds, cleaning, administration and security. The office sector is also focusing on maximizing building efficiency in the face of dwindling income, according to the report.


New York, which topped the list of the most expensive markets for operating expenses in 2012, saw a decrease of 66 cents per square foot to $11.90 per square foot. The other most expensive markets include San Francisco , Washington, Santa Monica and San Jose.


“Santa Monica and San Jose moved into the top five most expensive markets, replacing Boston and Los Angles from 2012,” said A.J. Rao, vice president with Kingsley Associates, the industry research firm that BOMA collaborates with to create the report. Boston saw a 9 percent decease and Los Angeles saw a 6 percent decrease.


On the other end of the spectrum, the least expensive markets in terms of total operating expenses include Salt Lake City, Atlanta, Phoenix, Cincinnati and Nashville.


The Washington market generates the highest per-square-foot rental income at $44.30. Others in the top five include New York, San Francisco, Santa Monica and San Mateo, Calif.


“The larger markets in the top 5 rental income list are fairly stable, but there is enough economic uncertainty on the horizon that it would not be surprising if they leveled off or even saw some decrease,” said Rao. “Over a longer term, they should all see some growth.”

August 7, 2013
By Carisa Chappell
CRE index declines 0.1% in July
July 30, 2013
Lodging Industry Returns to Normal, Expects Growth

The hotel sector has returned to pre-recession levels, and analysts now share a positive outlook for the lodging industry, MBA NewsLink reported July 24.


The sector’s improvement is the result of operating fundamentals reaching new heights, historically low interest rates and a sustainable economic recovery. The second half of 2013 is expected to be “fruitful” for both sellers and prospective buyers.


“Given the increase in operating profits, hotel investors have a notably more positive outlook than they did one year ago,” Arthur Adler, managing director and CEO Americas of Jones Lang LaSalle’s Hotels & Hospitality Group, told MBA NewsLink. “Hotly contested markets like Los Angeles, New York, Miami, Chicago and Philadelphia exhibit the highest ratio of buyers to sellers, and can expect transactions to heat up in the months ahead.”


About 55 percent of the hotel investors surveyed by Jones Lang LaSalle said they planned to pursue acquisitions over the next six months; 28 percent said they would focus on assets. The frequency of “buy” activity has increased 5 percent compared to six months ago, which suggests a continuous upward trend.


Target cap rates remained steady at an average of 7.6 percent, Adler said. However, Jones Lang LaSalle reported that cap rates are expected to decline slightly during the second half of the year, signifying an uptick in asset values, MBA NewsLink reported.

Leveraged internal rate-of-return requirements decreased, falling 40 basis points below the most recent three-year average. However, recent interest-rate movement is expected to influence investors’ expectations for future returns.


Among surveyed cities, Boston and San Francisco rank as top investment target markets with the strongest expectations for hotel performance. Closely behind were major gateway markets, including Hawaii, Los Angeles, Miami, New York and Seattle.


Adler said that rising corporate and group demand, along with an increase in international visitors — particularly those from China and Brazil — have driven this performance.


“Limited new supply additions across the country will underpin performance expectations in the near-term; however, New York is the exception,” Adler told MBA NewsLink. He said that Manhattan represents the highest new construction pipeline of any major U.S. market, with nearly 3,000 rooms becoming available in 2013. “Despite an increase in new supply, investors still ranked New York among the top in terms of outlook expectations, and expect rapid absorption and continued strong top-line performance.”

July 15, 2013

Post Properties celebrates 20 years as public company


Since becoming a public company 20 years ago, Post Properties Inc. (NYSE: PPS) has witnessed a plethora of changes in both the apartment industry and the needs of its residents.  


The Atlanta-based REIT, which was founded 42 years ago, held its initial public offering on July 15, 1993, at a price of $25.50 per share. The IPO generated proceeds of $234.6 million. As of July 15, the stock price is double that amount at $49.62. Post Properties currently has more than 20,000 apartment units in 61 communities.


Some of the major changes for Post Properties center on an apartment’s location, new technology and upgraded amenities, according to Dave Stockert, president and CEO of Post Properties since 2002. He said location remains a big driver of apartment choice and added that residents want to be near their places of employment, restaurants and night life.

“One change is a trend of our younger, well-educated customers to increasingly want to live in town in in-fill locations,” Stockert said. “They want to migrate back to city centers. We had a lot of suburban flight in the 1970s and 1980s. In the 1990s that trend began to reverse and gained momentum as city center-type space become more attractive. That trend will continue.”


 Technological Transformation

Stockert also said technology has had a large impact on his company and the entire apartment industry in the last two decades. For example, technology now helps dictate how the apartment units are priced.

“We use pricing models similar to hotel and airline pricing,” Stockert said. “That is something that’s changed the way we approach our business. Technology has also changed the way we interact with current and prospective customers and the way we market our apartments. It’s now all about Internet marketing and mobility.”

Post Properties launched MyPost, a smartphone application for its residents, in April 2013. The mobile app allows residents to do things such as pay rent, submit maintenance requests and view service history. Additionally, the company launched a new website that allows apartment hunters to search and compare units across multiple properties within various markets.


Competing with Condos

Stockert said the growth in popularity of condominiums caused Post Properties to become more aware about the look of its units.


“As we came into our own, we’ve become more competitive with condos,” Stockert said. “Today’s units typically have stainless steel appliances, granite counters and hardwood floors. The condo wave really raised the bar on high-quality apartments a lot. The whole apartment industry has been a little bit upgraded in the last 20 years.”


Pools and fitness centers are still important amenities, but residents today desire the latest aerobic equipment and workout machines with individual television screens, according to Stockert.


“We’ve also seen a shift away from community centers that were popular back in the day to now more of a cyber café setting,” he said. “It’s a lot more like Starbucks with single-serve coffee machines and snacks, outfitted with comfortable furniture and Wi-Fi connectivity. People want to congregate and be with other people, but not necessarily engaging.”

Looking ahead, Stockert said the company will continue to focus on high-quality apartment communities. Stockert credited the fact that Post Properties has always branded its communities with building loyalty. He also noted that Post Properties has benefited in the last 20 years from the discipline and transparency required of public REITs. 

“Being a public company certainly sharpens your focus and the way you operate,” he said. 

July 8, 2013

Era of the Smaller Office at an End? Perhaps Not

Volume of New Leasing Steadily Improving as has Size of the Average Office
By: Glen Marker, Senior Market Advisor, CoStar 

There’s been a lot of discussion of late trumpeting that a combination of Gen Y demand and technology innovation is leading companies to redesign and reduce their office space to optimize collaboration, create a more egalitarian distribution of space, and reduce costs. The office leasing data, however, points to another possible explanation for the smaller-than-average size of leases signed in 2009-2011 -- cyclicality.

Make no mistake; there’s definitely a trend towards a more efficient use of space among office users thanks to the advancement of digital file storage, Wi-Fi, and the like. But we’re a long way away from the 100 square feet per worker figure mentioned in a recent and oft-cited CoreNet survey.

It's complicated, not to mention costly, to implement the changes needed to reach this target. Challenges include the turnover rate of employees, time required to fill vacant positions, internal company growth rates, the length of existing leases, and the cost of leasing more space if one misses the mark.

Instead, recent office leasing trends point to the cyclicality of office demand as the driver of smaller lease sizes (see Exhibit 1).

Small businesses tend to shed jobs earlier in recessions than midsize and large companies do, but they also drive growth earlier in the recovery stage of each business cycle. In other words, the smaller than average size of office leases is as much about where we are in the business cycle as it is about the trend toward more efficient, collaborative spaces.

The good news is that the volume of new leasing has been steadily improving over the past few years, as has the size of the average office lease (see Exhibit 2).

The challenge is that 73% of recent leasing activity, in terms of the total square feet occupied, has been driven by tenants requiring less than 25,000 square feet of space. During the previous business cycle, 2000-2007, tenants requiring less than 25,000 square feet accounted for 67% of the total square feet of new leasing demand in any given year, whereas the small tenant share of new demand reached as high as 75% at the end of 2009.

In other words, it appears that smaller tenants continue to drive an above-average share of new demand at this stage in the recovery. 

July 6, 2013
Best Performing CRE Sectors

“Even in this slow 2%-GDP recovery, there are certain sectors that are not only performing well, but thriving. The most notable winners include multifamily, big-box distribution centers, high-end office, healthcare real estate and virtually any property type that is newly built or newly renovated.


“There are a number of forces at work that explain why these CRE sectors are winning in this recovery,” the report goes on to say. “For instance, the rise of e-commerce and mobile technology is contributing to the massive surge in demand for distribution-center space in multiple markets across the country. Some forces reflect a more risk-averse, practical consumer, which explains some of the shift in demand from owning to renting, from large space to smaller space."


Some other drivers of this momentum, as Cassidy Turley sees it are:


  • “Eighty-five million baby boomers are getting older, sicker and fatter, creating a healthcare bonanza. Sales of healthcare real estate posted a record high in 2012. Healthcare employment has increased four-fold since 1990 and is driving economic resurgence in markets such as Raleigh, Nashville, Houston, St. Louis, Minneapolis, Pittsburgh and Louisville. On its own, Obamacare will generate demand for an additional 46 million square feet of new MOB development by 2017.
  •  "E-commerce growth is triple the rate for traditional retail and is driving the growth of bulk warehouse properties, many one-million-square-foot-plus. We predict 80 million feet of demand over the next few years in a marketplace that has little inventory to meet e-commerce fulfillment requirements.
  • "It’s no secret that multifamily has been the leading CRE sector during the recovery, and we don’t see it abating. The primary renter demographics will grow by 2.2 million annually over the next three years and continue to drive multifamily demand – potentially 50% above the norm without taking into consideration pent up demand unleashed by the continuing recovery.”


So while the surge in the commercial real estate market might not be a watershed in macro-economic terms, neither is it sticking to the mold of trailing the economy by its traditional six-month lag.

July 5, 2013

Historically Low Cap Rates Fall Again

A single-tenant Sonic ground lease at 3290 Olentangy River Road, Columbus, Ohio recently sold for $975,000


CHICAGO—Cap rates for the single-tenant net-lease market have sunk even below the historic lows they hit during the first quarter of 2013, mostly due to “the low-interest rate environment that existed in the first half of second quarter,” according to a new study by The Boulder Group, a commercial real estate firm in suburban Chicago. The cap rates for retail and office properties went down to levels not seen since 2006, while those for industrial ones were largely unchanged from the last quarter.    


Retail properties remain the most-sought after sector. Their rates hit 7%, a decline of 25 basis points since the first quarter. Rates for office properties decreased to 7.54%, a decline of 16 basis points, and industrials were at 8%, a decline of only 2 basis points.   


During the first quarter the supply of properties also declined, but this trend reversed in the second quarter. “The overall supply increased 14% across all three sectors for the first time in the previous five quarters,” the firm says. A total of 2,760 properties were added to the retail sector, an increase of 15.4% from the first quarter. Furthermore, 258 properties were added to the office market, an increase of more than 21%.


However, much of this expansion was the result of owners adding vintage buildings or properties with shorter leases to the market so they could take advantage of the low cap rates.  In addition, many owners have been cutting shopping centers into single-tenant parcels to take advantage of the differences in cap rates between single-tenant properties and retail centers.    


“Transaction volume in the net lease market remains high as equity fundraising continues at a strong pace,” Boulder notes. A lot of capital is searching for somewhere to go and investors have increasingly sought properties with shorter leases, non-investment-grade tenants or have bundled small properties into portfolios to take advantage of economies of scale. “The excess capital raised has caused some significant mergers, acquisitions and large portfolio purchases recently in the net-lease market such as American Realty Capital Trust IV [and] American Realty Capital Properties’ $4.5 billion buying spree since May or the merger between Cole Credit Property Trust II and Sprint Realty Capital,” Boulder adds.     

June 19, 2013
Healthcare Real Estate
Jay Flaherty, chairman and CEO of HCP, Inc. (NYSE: HCP), joined for a CEO Spotlight video interview in Chicago at REITWeek 2013: NAREIT’s Investor Forum.

HCP invests in real estate serving the health care industry. The firm acquires, develops, leases, sells and manages health care real estate and is a capital partner to health care providers. Flaherty discussed the prospects for growth going forward in the health care REIT sector.

“Within medical office buildings, in part because of the advent of incremental technologies that allow for certain procedures that historically were done in an acute care hospital  setting, particularly non-invasive procedures now, they can take place in a medical office building,” he said. “So the medical office building portfolio of, maybe, 10 years ago was primarily used for doctor visits. Now you’re seeing some procedures actually take place in these medical office buildings."

Flaherty described HCP’s sustainability program.

“We’ve used sustainability in a much more comprehensive manner,” he said.  “Particularly in the life science and medical office building area, we’re very proud to have a number of LEED certified properties. We’ve earned over 100 Energy Star designations, far and away the leader in that space. So that’s all good, but when we take that to the next level, in the last year and a half we’ve taken a board of director approach on down. We want to be a good corporate citizen.”

Flaherty also talked about how health care reform is affecting his business.

“I think we’ll see a number of companies get quite a bit larger, because health care reform will reward companies that create quality outcomes, have critical mass, particularly in local markets, and run efficient operations,” he said.

Flaherty said the results of the implementation of the Affordable Care Act should bring new opportunities for his company.

“As this plays out in the next 12 to 18 months, it’s going to create significant opportunities for our operating partners and, as a second derivative, HCP, because we want to continue to be their real estate capital partner of choice,” he said.
April 30, 2013
Healthcare REITs concerned about nursing home investments
By A.D. Pruit

Health Care REIT Inc., HCN +0.12%which leases to about 250 nursing homes nationwide, and Senior Housing Properties Trust, SNH -0.63%which is the landlord to nearly 50 nursing homes, have indicated they are greatly reducing their exposure or that they might exit the sector.


Ventas Inc., VTR -0.23%one of the largest health-care landlords in the U.S., said it is comfortable with the approximately 300 nursing homes it already houses but won't make major new acquisitions in the sector until there is more clarity on Medicare rates. Instead, Ventas plans to expand into assisted-living properties that aren't dependent on government subsidies.

The retreat comes as the outlook for nursing homes remains cloudy. A growing number of cash-strapped states are scaling back Medicaid reimbursement payments to nursing homes, while the federal government cut Medicare rates by 2% on April 1 as part of across-the-board budget cuts known as sequestration. These entitlement programs combined make up about 90% of nursing-home revenue. If they are diminished, some nursing homes could have difficulty paying their rent.

David Hegarty, president of Senior Housing Properties Trust, a real-estate investment trust based in Newton, Mass., said the company hasn't raised rents on most nursing-home tenants in five years mostly because their business operations have been under financial strain in a sputtering economy.


Mr. Hegarty said the company is considering selling its 48 stand-alone nursing-home properties, which account for 4% of its net operating income and about 12% of the total number of properties Senior Housing owns. The company is now focusing on private-pay facilities including medical-office buildings and assisted-living properties.


There are more than 1.5 million nursing-home beds nationwide that provide intensive health- and personal-care services to the elderly.


Medicare pays for patients admitted for post-surgery rehabilitation for stays around 90 days or less. Medicaid, accounting for about 70% of most nursing-homes' revenue, subsidizes longer stays for indigent elderly patients.


The sequester will result in $11 billion in lost revenue to all Medicare providers. That is on top of an estimated $7 billion shortfall in Medicaid reimbursements nationwide last year, a 14.3% jump from 2011, according to the American Health Care Association.


"In the last couple of years, because of the Medicare cuts, we thought…that [it] would be wiser to reduce that exposure," said George Chapman, chief executive of Health Care REIT. Instead, the company plans to focus on properties where tenants pay out-of-pocket for expenses, such as medical-office buildings, assisted-living properties and independent-living centers.


The Toledo-based company is negotiating to sell approximately $250 million in nursing-home properties to several of its operators. The company sold 64 nursing homes valued at about $325 million last year.


Health Care REIT plans to reduce its nursing-home exposure to between 12% and 15% of its portfolio, from 18% and 25% at the end of 2011. Its largest nursing-home tenant is Genesis HealthCare, which operates more than 80% of the REIT's skilled-nursing portfolio.


Debra Cafaro, chief executive of Chicago-based Ventas, said the company hasn't disposed a significant amount of its nursing-home facilities, which represent 16% of its balance sheet. But, it has aggressively expanded into private-pay assisted-living properties and medical-office buildings, which account for nearly 80% of its investments.


"We have good cash flow coverage on our skilled nursing portfolio," Ms. Cafaro said. "We are cautious about committing large amounts of capital right now in skilled nursing until there is a little bit more visibility on federal and state reimbursements to our tenant customers."


Some nursing-home landlords say the market risk is overstated. If the sequester-induced cuts do occur, "We don't believe it will have a big impact on the operators profitability," said Craig Bernfield, chief executive and founder of Aviv REIT Inc., AVIV -1.71%based in Chicago.


Aviv owns 257 properties across the country, and 87% of its rents are derived from skilled-nursing tenants.

So far, REIT equity investors remain attracted to nursing-home landlords, in part because of their relatively high dividend yields.


Health Care REIT's share price is up 22.6% so far this year and it pays a dividend yield of 4%, higher than the 3.3% yield for the overall REIT sector.


A version of this article appeared May 1, 2013, on page C6 in the U.S. edition of The Wall Street Journal, with the headline: Health-Care Owners Shun Nursing Homes.

March 19, 2013

Small Infrastructure Gains Are Observed in Engineering Report

America’s roads, bridges, water systems and energy networks have long been in poor repair. The American Society of Civil Engineers, which releases a report every four years that evaluates the problem in a letter-grade format, awarded the nation a “D” in its last report, published in 2009.


The latest Report Card for America’s Infrastructure, released Tuesday, has an unexpected bit of qualified good news: the grade has inched up to a D+. It is the first time in the 15 years that the engineering organization has conducted its study that the grade has improved.


The report is showing progress in six areas, including bridges, rail, wastewater and drinking water. No category saw a lower grade than that given in the previous report, though the nation’s inland ports, waterways and levees received a near-flunking grade of D-. (The full report can be downloaded, along with interactive analysis of all 50 states, at


Some connected trends have led to the shift, according to the engineering organization. It cited a rise in the private financing of public projects and renewed attention from state and local government to kick-start their own projects, rather than wait for Washington to send money. The jump in private investment was instrumental, for example, in the improved outlook for the nation’s rails, according to the report. That evaluation jumped to a C+ from a C-. The group also cited short-term increases in financing — a reference to President Obama’s economic stimulus package, which focused in part on “shovel-ready” projects like road and bridge repair.


“When investments are made and projects move forward, the grades rise,” the report stated.

Gregory E. DiLoreto, the group’s president, said, “A D+ is simply unacceptable for anyone serious about strengthening our nation’s economy,” but he added that the improvement “shows that this problem can be solved.”

The engineering group estimates that the nation needs an investment of about $3.6 trillion by 2020, but that current levels of spending will leave a shortfall of $1.6 trillion.


The report was greeted with approval by the Obama administration, which has called for greater infrastructure investment from government and private sources, and has moved to streamline the process of granting permits and getting projects under way. Matt Lehrich, an administration spokesman, said, “This report confirms what we already know: that while smart investments in infrastructure have not only created jobs but started to produce the improvements American workers and businesses will need to compete in a global economy, we have a very long way to go.”


Phineas Baxandall, a senior analyst with U.S. Pirg, the public interest advocacy group, said that while the president’s speeches about high-profile programs like high-speed rail and solar energy investment were the most visible elements of the American Recovery and Reinvestment Act of 2009, “one of the things that the stimulus got right was to invest in repair rather than new capacity,” in existing roads, bridges and other infrastructure. “Pothole repair is always a shovel-ready endeavor,” he said.


An expert in infrastructure who is more skeptical of government investment, Robert W. Poole Jr. of the Reason Foundation, said the results of the new report card tracked what he has been arguing for some time in the face of doom-and-gloom pronouncements: “There actually is progress.”


Congress and state transportation departments have increased their spending over the past 10 or 15 years, he noted, and many of them have increased the gasoline taxes that pay for a great deal of road work. He also applauded the work of railroads and private companies that have invested in ports development, which show “the ability to do a lot of things without, necessarily, a big additional slug from the federal government.”


Edward G. Rendell, the former governor of Pennsylvania who is now the co-chairman of Building America’s Future Educational Fund, a group that advocates a stronger national effort at upgrading infrastructure, said “the improvement is modest, and frankly, the investment is modest.” His group has called for hundreds of billions of dollars a year in additional spending and a commission to create a long-term plan to address the issues. “Not only do we need more investment, we need to do it right,” he said.

March 15, 2013

The State of Real Estate Outsourcing

By Maria Novak, senior managing director of global strategy for Cushman & Wakefield’s corporate occupier and investor services group.


The increase in outsourcing activity does not mean that it’s all smooth sailing for service providers, says Novak.

NEW YORK CITY-The business of outsourcing real estate services has evolved significantly since the concept was first pioneered in the early 1990’s and the role service providers play in the industry today is vastly different than even a few years ago. From managing lease transactions and corporate facilities, to assisting with portfolio optimization and business process improvement strategies, service providers are rapidly assuming responsibilities traditionally held by internal corporate real estate departments.


Driven by the need to control costs and improve efficiency, corporate real estate is turning to service providers for not just best-in-class tactical services, but to develop actionable strategies that will help them deliver value back to their organizations. As this unfolds, property owners are also beginning to realize the benefits of increasing their outsourcing efforts and in turn, are seeking a broader suite of services from providers.


User Outsourcing

The value proposition for corporate real estate departments to develop formal outsourcing strategies is compelling. Outsourcing offers organizations a chance to shift significant non-core business expenses off their P&L’s. At the same time, it frees up individuals inside the real estate organization to focus on more value-added activities, such as how to best support business units in improving employee productivity. Outsourcing gives an organization a consistent set of processes that create efficiencies and provide best practice solutions for solving complex problems.


There are many types of outsourcing models and organizations have the ability to design outsource partnerships that can range from experimental, where service provider dependence is low, to models that are more transformational, where dependence on the outsource partner is high. Varying models offer trade-offs and some can present challenges for real estate departments from a cultural standpoint. In most cases today, corporations choose to partner with multiple providers based either on their functional expertise (i.e., transaction management, facility management, lease administration) or geographic expertise (i.e., Americas, EMEA, APAC).


Owner Outsourcing

Much like the corporate side, internal cost pressures are driving owners to outsource more and in different ways. An increased regulatory environment globally, as well as the additional resources needed to tackle issues such as energy consumption, business continuity, social media and technology, have increased operating costs for many owners. These firms are beginning to turn to service providers to not just manage properties and collect rent, but to provide expertise in areas that create asset value. This allows owners to be able to focus on their core activities of making real estate investments.


Looking Ahead

The increase in outsourcing activity does not mean that it’s all smooth sailing for service providers. To the contrary, it is creating fierce competition in the provider industry. While the benefits of outsourcing are clear, corporate users are mindful that many providers are just beginning to scale the more strategic side of their platforms.


Owner concerns hinge on choosing which firm can provide the best advice in strategically managing assets for value creation. One thing is clear however, with the continuing need to control costs in the global economy, the trend towards more outsourcing, with broader and more complex services, is not likely to slow in the near future.  


Maria Novak is the senior managing director of global strategy for Cushman & Wakefield’s corporate occupier and investor services group. The views expressed in this column are the author’s own.

March 13, 2013 

Changing Office Trends Hold Major Implications for Future Office Demand

Pioneered by Tech Firms in California, Communal Workspace Model Becoming More Mainstream Among Big Office Firms
Perhaps just as the inevitable disappearance of music, video and books stores should have been foreseen at the onset of a digitized connected world, so too should thecommercial real estate industry start taking a hard look at changes occurring in the office market.

Tenants are downsizing their offices, particularly larger public firms, as they increasingly adopt policies for sharing non-dedicated offices and implement technology to support their employees' ability to work anywhere and anytime, according to Norm G. Miller, PhD, a professor at the University of San Diego, Burnham-Moores, Center for Real Estate, in a webinar he presented to CoStar subscribers last week.

Miller said he put together the webinar to examine what would happen if office tenants used 20% less of the nation’s current office space, which has a total valuation of $1.25 trillion. That decrease in demand would represent $250 billion in excess office capacity. Although the current situation is not that dire, Miller said the trend is real, and he presented how it is currently playing out and the long-term implications foroffice building owners and investors.

Following the webinar, CoStar News interviewed Dr. Miller for a more in-depth discussion of the topic and surveyed a wide sample of webinar participants to share their firsthand account of the ongoing trend and its implications.

According to Miller, four major trends are impacting the office market:
* Move to more standardized work space.
* Non-dedicated office space (sharing), along with more on-site amenities.
* Growing acceptance, even encouragement of telecommuting and working in third places, and
* More collaborative work spaces and functional project teams.

“Historically, under the old corporate hierarchy, everyone had their own assigned office or work desk and we saw utilization rates of 50% or so,” Miller said. “Firms that have moved to sharing space are seeing much more efficient utilization rates of 80% to 95%, sometimes using conference space seats to handle unexpected overflow. Some also have arrangements with temporary office space vendors like Liquid Space, Regus, HQ, Instant Space, as well as supporting employees working from home or third places.”

“The average amount of leased space (per employee) has been shrinking,” he said. “As of mid-2012 the average was 185 square feet per worker, well below the average space assumption in most office-demand models, and well below figures 10 years ago.”

There have definitely been changes in office demand, agreed Tim Wang, director and head of investment research for investor Clarion Partners in New York.

“Ten years ago, 250 square feet per office employee was the gold standard in office real estate. Today, that average has dropped to approximately 195 square feet. While some office tenants are hesitating to commit to large leases primarily due to economic uncertainties, the long-term trend is clearly shifting towards efficient space usage.”

Brian J. Parthum, who tracks employment and economic trends for Southeast Michigan Council of Governments (SEMCOG) in Detroit, said his group is a case in point. 

“Our own organization recently moved into a smaller space,” Parthum said. “Efficient office design has allowed us to rent 7,000 square feet less space -- down from 34,000 square feet -- and at a lower rate. Additionally, we now have an office that is more attractive to the next generation of staff. The new space takes advantage of natural light, promotes face-to-face contact, and utilizes laptops, wireless technology, and mobile devices to allow for a more flexible work environment.”

“Technology is allowing companies to be more paperless and work from a single laptop or device," agreed Jason Lewis, president and managing broker of EcoSpace Inc. a brokerage firm in Denver that specializes in working with tenants to find sustainable workplaces. "Culturally the new generation of employees is requiring a more flexible and open environment. And in regards to the economics, there is the need for both startups and corporations to lower their burn rate and conserve cash, something that can easily be done by restructuring the way they view their office space,” Lewis said.

For now, at least, the trend is more prevalent among large corporate office users with locations in multiple cities. John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, NJ, said also that the trend to shared office space is more prevalent among larger publically traded companies than smaller firms.

“The majority of our smaller tenants, those that lease less than 5,000 square feet, still prefer private offices than an open plan,” Osborne said. “The majority of our smaller tenants, those that lease less than 5,000 square feet, still prefer private offices than an open plan,” noted John G. Osborne, executive director, leasing and marketing at Bergman Real Estate Group in Iselin, N.J.

For many office-using firms, the Great Recession made downsizing a greater imperative. Occupancy rates dropped across the country as employers downsized staff and sought efficiencies through lower square foot per employee footprints.

“Everything we’ve seen since 2006 and 2008 could be called the ‘Great Deleveraging,’” said Wilson Greenlaw, vice president of Thalhimer in Fredericksburg, VA. “Companies were removing fluff and eventually someone got around to looking at space utilization. Now that it is on the table, it will be maximized and implemented, resulting in a cultural shift for the office worker.”

“Some of it is economic," agreed Miller. "That is, companies realized they could save money by minimizing excess space. But I believe the single biggest factor driving this trend is technology. Now that we have moved to cloud-based file storage and can access our work from anywhere and it can be easily shared, workers no longer have to be tethered to an office to be productive. Technology is very much at the heart of this transformation.”

Collaboration, Not Telecommuting, Is the Goal

Stephen Siena, senior research analyst for Jones Lang LaSalle Americas Inc. in Tampa, said there is also a change in business culture going on as well: the desire for more collaboration.

“In my view, cost cutting is likely to go away as the good times return,” Siena said, “but the open floor plate will become the norm because of the heightened productivity and creativity it provides. For this reason, I also think the technological aspects (telecommuting) will not be nearly as dominate a force as many expect. Open floor plates and more common space seem to be the antithesis of telecommuting.”

The addition of more on-site amenity space for office employees has helped to somewhat offset the reduced demand for space from telecommuting for landlords and reflects a reaction to some of the extremely long hours that these employees often work, said Garrick Brown, director of research at Cassidy Turley in San Francisco.

“The interesting thing that I have found about telecommuting is that it does not work in economic downturns or in the kind of atmosphere of fear that you see with struggling companies,” Brown said. “Look at Yahoo’s recent announcement that they were cutting back significantly on allowing employees to telecommute. Whenever companies are in trouble, telecommuting goes out the window. This is driven mostly by management, who in times of struggle often revert to old-world thinking about how to measure worker productivity and become clock watchers instead of looking for results in terms of end product.”

“But it is also driven by worker paranoia. If your company is downsizing, suddenly you want to be highly visible in your workplace, regardless of whether you may actually be just as, if not more productive, working from your home office,” Brown said.

Essentially what we are seeing is the adoption of the communal workspace model that a lot of tech companies have pioneered over the last couple of years by non-tech users, said Brown. 

“There have been a few tech firms in the San Francisco Bay Area that have gotten to worker densities of up to seven workers per 1,000 square feet of space,” Brown said. “The average back around [the year] 2000 was four workers per 1,000 square feet. Heading into the downturn in 2008 it stood at five per 1,000 square feet.”

“Though the tech companies do use more space for communal recreation and other amenities (such as game or recreation rooms, massage and stress-reduction rooms, nap rooms, etc.), they have abandoned the cubicle and the corner office and many have freeform sitting arrangements,” he said. “Everyone has wireless connections for their laptops, tablets and smartphones and people roam around. They have communal meeting rooms that can be used for meetings or private calls and projects.”

More People Means More Stress On Facilites

Squeezing more people into existing or even smaller spaces is putting structural stress on an office buildings systems, such as parking, elevators, restrooms and utilities that were not designed for the new demands of density that occupiers are seeking, noted Christian Beaudoin, director of Jones Lang LaSalle in Chicago.

This unforeseen consequence of higher density is often overlooked, agreed Miller.

“The tenant saves a little money by leasing less space, but the biggest property impact is on parking demand. It can increase by 50% or so. Some buildings need seven spots per 1,000 square feet for the intensively used space,” Miller said.

Kim Kelley Richards, senior project manager for Gola Corporate Real Estate in Norristown, PA, said it is becoming increasingly more difficult to accommodate parking. "Having more tenants in space that was initially planned for 4 (parking space) per 1,000 square feet puts additional stress on building mechanical systems, and impacts fit-out costs due to the need for additional electric, heating and cooling. In some cases we are even seeing bathroom facilities and janitorial services impacted.”

“In addition to downsizing their space, tenants are increasingly downsizing the ‘deal,’” said Thalhimer’s Wilson Greenlaw. “Tenants are nervous. Long leases used to be 10 years. Then they were seven and five years. Now they’re three years around here. The compensation to brokers is greatly reduced for the same amount of work.”

Shaking Up Office Fundamentals

What the downsizing trend means for office fundamentals in the long term remains mostly conjecture at this point, but it is widely perceived as holding major implications for those who invest in and underwrite office space.

The dollars and cents of it are fairly obvious, said Ron Berkebile, management and budget analyst for the City of Virginia Beach, VA

“For businesses, there is a rent expenditure offset. While green buildings command a higher per-square-foot rate, businesses require less square footage.”

Hypothetically, Berkebile figures it like this. A 20,000-square-foot space in a standard office building that rents for $18/square foot has a total annual cost of $360,000. A more efficient layout in a newer, green building in which the same tenant may occupy only 15,000 square feet but may have a rent of $20/square foot for a total annual bill of $300,000.

“The tenant benefits with green building workspace; employees are happier; and rent reductions are achieved. Alternatively, the building owner benefits from premium rates and more tenants,” Berkebile said.

Ultimately, Miller and other experts believe, the trend toward more-efficient utilization of office space will continue to have an impact.

"I see office demand at the user level falling by about 20% over the next decade,” said Cassidy Turley’s Garrick Brown. “This is actually a more conservative number than I have seen from a lot of other analysts, but I think the aforementioned trend of old world thinking interfering with telecommuting will never go away completely.”

“Also, while I see a lot of businesses adapting the tech model and squeezing the most out of their square footage usage, I think there are some fields where this just can’t happen for pure logistics sake. Call centers, for example, where cubicles serve a real purpose and allow for call center employees to reduce noise. You don’t have that in these new open space designs,” Brown said.

Importantly, Brown sees a distinction between the long-term trend towards companies using less office space per worker, and overall demand for office space as measured in office absorption, which he expects will tick-up over the next couple of years as companies return to growth mode in a recovering economy .

“We will see declining vacancy and increased occupancy growth in the short-term… but the footprints of users will be less and the long-term trend for office demand will be impacted,” Brown said. “This trend may not really show up in the stats for quite some time as it will be masked by the general uptick in office demand.”

In addition, most of the downsizing is coming from decreased square footage for “work space” in a building and not in the amount of public and shared space, which actually is increasing, according to Norm Miller. 

“Based on anecdotal evidence, I’d say for every two square feet a firm gives up in individual office space they add one square foot of extra and flexible meeting space,” Miller said. “This mitigates the downsizing somewhat, and instead of going from say 250 square feet to 125 square feet they end up at 150 or 175 square feet, and firms targeting to go down to 100 square feet will probably end up at 125 to 130 square feet based on my simulation research,” Miller said.

The shift will also affect geographies and individual markets differently, Miller said.

“The places where space becomes excess and where tenants are growing never seem to match up," explained Miller. "We will always see new construction in any market with any economic growth. Markets like Detroit might decline but not because of workspace trends, just because of city-based issues,” Miller said. “In some markets like Washington, DC, with so much government space, I can see significant impacts and less need for net new space. But then again, much of that space is obsolete and it is hard to retrofit some older buildings, so it will most likely mean a slowdown in new space with a significant portion of newly retrofit and reconfigured space.”

“But again, the obsolescence of much of the existing space will mean we will see new space built, albeit at a slower pace than before. Also markets like Boston, Chicago, New York, San Francisco, LA and even Cincinnati will be affected with a slower rate of new construction and more rapid pace of retrofits,” he said.

Jones Lang LaSalle’s Beaudoin said those same factors -- the constraints of the existing inventory and the downsizing trend -- also result in more build-to-suit activity, despite historic high levels of vacancy.

"Downsizing trends will not negate the need for new space, because much of the existing stock is not suited for the workplace of the future," observed Beaudoin. "There will be huge opportunities for clever developers and architects to repurpose obsolete offices throughout the U.S.”

Another consequence is the opportunity to convert former office buildings to other uses.

The trend “is helping us (to convert) some of the less-desirable office space to residential units to take advantage of downtown’s increased attractiveness to young professionals and the businesses that are seeking to recruit them," noted Vince Adamus, vice president, real estate and business development for the Greater Cleveland Partnership in Cleveland. "From what was assumed to be a negative situation, a more efficient and more attractive environment is shaping up.”

To be competitive in the future, office space needs to offer natural light, better temperature controls, better ventilation and options for more flexible reconfiguration, he said.

Miller identified three major implications for landlords.

* Nearly all of the existing office space could be reconfigured more efficiently with better natural light, more energy efficiency, healthier better ventilation and more sound control.
* Great designs will try and minimize interruptions and provide flexible work space. And
* Landlords are not selling space but productivity and more productive space will command higher rents per square foot.

Just a Fad That Fade When Good Times Return?

For the landlord hoping the downsizing is just an over-reaction to years of recessions and slow growth, Jason Lewis, president and managing broker of EcoSpace in Denver, says: “Not a chance!”

“Downsizing is here to stay as the new generation of workers will keep requiring a more collaborative, flexible and social work environment. With increased density of populations and increased ability to work mobile, the need for huge corner offices and closed wall work environments will be all but extinct in the near future,” he said.

Says Paula Buffa, senior director of Cushman & Wakefield of Florida in Tampa, “I do think some companies will add employees back to their roster but not to the level as before. Companies have learned to make do during the past couple of years and I believe most will maintain with status quo or, if they add employees, not to the level of the past.”

Norm Miller agrees. “It is just like sustainability. It makes economic sense and puts pressure on firms to think harder about securing productive space, independent of size. This downsizing will parallel the move to more sustainable space, with more natural light and ventilation and more flexibility, with some privacy options and a these trends are irreversible as our use of digital files instead of hard copy files. But it takes time and it always takes longer than I expect.”



February 24, 2012


Big Companies Getting into Student Housing


Housing for college students, long dominated by small players willing to put up with beer pong and raucous parties, is attracting some of the biggest names in real-estate development.


Lennar Corp., LEN-0.54%one of the nation's largest home builders, this month broke ground on its first off-campus apartment community near the University of Texas at Austin. Toll Brothers Inc., TOL-1.56%best known for its sprawling suburban homes, is purchasing land near the University of Maryland in College Park and Penn State University in State College, Pa., on which it plans to build upscale student housing. The two Toll Brothers projects, totaling about 3,100 beds, could open by 2015.

Resort Living Comes to Campus

Brandywine Realty Trust, BDN+1.40%a real-estate investment trust that specializes in suburban office space and other real estate, recently teamed up with Campus Crest Communities Inc., CCG+0.81%to build a 33-story tower in Philadelphia that will serve students from several schools, including the University of Pennsylvania and Drexel University.


The moves are designed to help the companies better weather the next economic recession by diversifying into areas considered less sensitive to downturns. During the real-estate crash, as prices of single-family homes declined and apartment landlords reduced rent, many student-housing landlords continued to raise rent, thanks to the generosity of parents and student-loan programs.


Meanwhile, established players in the market are on a buying spree in hopes of remaining competitive against the big-name newcomers. Last year, a record $3.7 billion of student-housing properties traded hands, up nearly 95% from the previous year, according to ARA Student Housing.




"A lot of people think our space is hot," said J. Wesley Rogers, president of Landmark Properties, a longtime owner and developer with about 5,000 beds and 2,700 under construction. "You see a lot of new players circling the space right now."

The frenzy comes amid increasing debate about the skyrocketing cost of college tuition and the ease of borrowing that is leading many students to graduate with heavy debt loads. Also, the companies are ramping up construction at time when college-student enrollment has slipped, falling 1.8% in 2012 from 2011, according to the nonprofit National Student Clearinghouse Research Center.


But the companies maintain that over the long term, enrollment will continue to rise, especially at large state schools where much of the construction is taking place. And they believe that demographics support an expanding industry. More than three million high-school students are expected to graduate each year until the 2021-2022 academic year, according to the Department of Education, and many of them are expected to pursue higher education. At the same time, enrollment from foreign students remains robust.


Yet, most colleges and universities don't have enough beds to go around. American colleges are short a total of between 1.5 million and 2.15 million beds, according to research from consultant Michael Gallis & Associates. Moreover, many colleges and universities lack the funds needed to upgrade current dormitories or build new ones and are relying on the private sector to fill the gap.


"They just can't accommodate all these people. Some of them have just handed over all the reins altogether," said Will Baker, a senior vice president with Walker & Dunlop Inc., WD+0.43%which financed $157.1 million of off-campus housing deals in 2012.

The University of Kentucky is getting out of the student-housing business and plans to turn over its dormitories to a private company that will upgrade and manage the aging properties. Dawn Wotapka has details on Lunch Break.


Still, some industry analysts question whether some newcomers to student housing understand the hidden risks and high costs associated with the business, which requires more maintenance and management oversight than typical apartment housing. Students are notoriously hard on housing and they are known to hop from property to property, leaving older properties more at risk of occupancy declines.


Each bed typically turns over annually, and a bed that is empty when school starts often remains empty for the entire semester. Operators also have to balance the demands of students straddling childhood and adulthood, educators and overprotective parents.


Toll Brothers says it likely will allow property managers familiar with the student-housing business to help. "The management is very important because you have three months to get these buildings leased up," said Martin Connor, Toll's chief financial officer. "You have a two-week turnover period, generally, where all your tenants move out and all your tenants move in."

There is growing concern of overbuilding in some markets. Construction numbers for individual cities are limited, but some 40,000 off-campus beds are in the pipeline for 2013, according to ARA. The firm tracks 71 projects under way, up from about 40 last year.


To entice students to pay top dollar, developers are adding upscale amenities including tanning beds, resort-style pools and ice-skating rinks. Today's developments give students their own bedroom and bathroom, allowing developers to charge more rent. Depending on the market and how many students share a unit, monthly rents can approach $1,000 per bed.


"As today's parents know as they drop their kids off at college, these are not the most inexpensive places you can find, like some of us may have experienced in our college days," said Mr. Connor, 48 years old. "They are high quality, in great locations and generate significant rent."


There are concerns that some companies might be adding capacity too quickly. American Campus Communities Inc., ACC-0.70%the nation's largest publicly held owner of student housing, which spent $1.8 billion on new beds last year, surprised industry watchers earlier this month when it reported that its student housing portfolio was 43.3% preleased as of February for the 2013 academic year that begins next fall, down from 46.4% at this time last year.


"There's still plenty of time in the leasing season," American Campus Chief Executive Bill Bayless pointed out.

While it is still early, analysts are monitoring the issue. Alexander Goldfarb, a REIT analyst with Sandler O'Neill + Partners, said he is confident American Campus will fill the beds before the new academic year begins. But "if we get another quarter and the gap is still pretty big, people may question if it's a macro issue."


Developers' heavy construction activity has prompted Freddie Mac, FMCC-2.08%which purchases student-housing loans from lenders, to turn somewhat cautious. "You can't help but notice there's a lot of interest now going into that space," said John Cannon, head of multifamily sales at Freddie Mac, which purchased $1.7 billion in student-housing loans last year, up 55% from 2011.

"You want to be careful that the market's not overheating and you're not getting ahead of yourself," he said.


A big reason why companies are diversifying into student housing is that they believe the sector is recession-resistant.

Kayne Anderson Real Estate Advisors, a private-equity investor with 15,000 beds, posted annual returns that exceeded 20% between 2007 and 2012, despite the economic downturn. The firm isn't worried about oversupply.


"I don't think we're in a situation where you're looking at overdevelopment," said Al Rabil, managing partner of Kayne Anderson. "In almost all cases, you're looking at a situation where development is just catching up in creating supply to keep up with demand."

February 20, 2013

Apartment Rent Growth Expected To Decelerate In Top Markets Ahead of New Supply Wave

2013 To See Developers Add Largest Number of Multifamily Units Since 2009
With continued strong demand for apartments being met by a legitimate multifamily building boom in many U.S. cities, increasing apartment rents are expected to reach something of an inflection point in 2013.

Rent growth in some metros such as Boston, Washington, D.C. and New York is cooling down as those markets are doused by a wave of new supply from developers. Other areas of the U.S., such as the San Francisco Bay Area and Silicon Valley, remain red hot, while in still other markets like Southern California, St. Louis and Salt Lake City, apartment vacancies have tightened to the point where rents are starting to increase again.

By any measure, the apartment sector has enjoyed the strongest rebound of any of the four major CRE property types, and can now be considered fully recovered, observed CoStar Senior Real Estate Economist Erica Champion who, along with Director of Research-Multifamily Luis Mejia and Real Estate Economist Francis Yuen, recently presented CoStar's latest analysis of the multifamily market as part of a 2012 Review and Outlook presentation to clients.

Overall apartment vacancies have compressed 220 basis points from their late 2009 peak and are 50 bps below the 10-year average. Average rents have risen 3.2% above the prior cycle’s peak, and three-quarters of the top U.S. metros surveyed by CoStar and its economic forecasting firm, Property and Portfolio Research have fully regained their prior peak levels.

Apartment Supply to Hit 4-Year High

Developers have taken notice of the tightening conditions and rushed build new apartments wherever they can. As a result, 2013 will be the first year since 2009 that the number of new apartment units added to the market will actually return to historic average levels. About 140,000 units will enter the top 54 markets this year -- actually 30% above the 10-year historical average.

The key demographic for apartment demand, employment among younger Americans under the age of 35, rose sharply in the last few months of 2012, providing a shot in the arm for the apartment market, Champion said. That welcome news prompted surprised analysts to upwardly revise total apartment demand for 2012 by 25%.

CoStar’s baseline expectation is that 2013 job growth will remain at roughly the same level as last year, and apartment analysts will closely monitor how many of those jobs go to young people in as well as consumer confidence in the coming year.

Apartment demand is likewise expected to stay roughly the same or a bit below average as the new supply causes vacancy rates to tick up around the country over the next year.

The usual suspects -- resilient, high-population growth markets in technology and energy bastions like Raleigh, NC; Seattle and Texas metros -- again led apartment market growth in 2012. But this time, the good news didn’t stop there.

"What we’re starting to see is evidence of a more broad-based recovery starting to propel renter demand growth in some of the housing bust metros," including Phoenix, Atlanta and a handful of Florida markets such as Palm Beach County, Orlando and Fort Lauderdale, Champion said.

With construction starts and permits picking up rapidly since 2010, a wave of new apartment supply is deluging markets that recovered early in the cycle such as Dallas-Fort Worth, Houston, Washington, D.C., Denver, and Seattle. Those markets will see some of the steepest jumps in vacancy in 2013.

In total, about 183,000 units were under construction in the 54 largest metros at the end of 2012 -- a 66% increase over a year earlier, with many of the projects breaking ground in the fourth quarter. As job growth has gained steam, developers have even moved off the sidelines in markets like Phoenix and Atlanta, which to date has seen only modest levels of new supply.

As new supply enters the market, Seattle, Boston and Washington, D.C., which faces the additional pressure of federal spending cuts, are all starting to feel vacancy pressure. The coming supply wave will cause vacancy rates to tick up in 32 of the 54 largest metros in 2013, CoStar predicts.

Rents Gains Moderate As New Supply Hits

Those vacancy increases are starting to temper the strong rent growth of recent years, at least in some coastal metros. Others are still seeing red-hot rent growth. Tech oriented metros and some Texas markets had very strong cumulative rent growth coming out of the recession. The San Francisco Bay Area and Silicon Valley posted double-digit year-over-year gains for two consecutive years.

Over the last couple of quarters, rent growth has been "a lot more sane," and CoStar expects that moderation to continue, Champion said.

In fact, in certain primary markets such as New York, D.C. and Boston that experienced the earliest rent growth and apartment construction, landlords’ ability to push rents is waning considerably. Other markets where vacancies are starting to tighten such as Los Angeles, St. Louis, Salt Lake City, San Diego and Memphis will likely see rent growth heat up this year.

Transit-accessible properties, particularly newer properties of 100 or more units with urban amenities, which will enjoy stronger occupancy effective rents than properties not located near mass transit. 
Rents Gains Moderate As New Supply Hits
Those vacancy increases are starting to temper the strong rent growth of recent years, at least in some coastal metros. Others are still seeing red-hot rent growth. Tech oriented metros and some Texas markets had very strong cumulative rent growth coming out of the recession. The San Francisco Bay Area and Silicon Valley posted double-digit year-over-year gains for two consecutive years.

Over the last couple of quarters, rent growth has been "a lot more sane," and CoStar expects that moderation to continue, Champion said.

In fact, in certain primary markets such as New York, D.C. and Boston that experienced the earliest rent growth and apartment construction, landlords’ ability to push rents is waning considerably. Other markets where vacancies are starting to tighten such as Los Angeles, St. Louis, Salt Lake City, San Diego and Memphis will likely see rent growth heat up this year.

Transit-accessible properties, particularly newer properties of 100 or more units with urban amenities, which will enjoy stronger occupancy effective rents than properties not located near mass transit.

Apartment, Single-Family Markets Can Peacefully Coexist

The apartment market is also facing potential effects of the single-family market recovery, Mejia said. While recent signs of improvement in the single family sales market can attract current renters to the for-sale market, the same factors can also benefit multifamily landlords and owners, he said.

"Growth in single family sales can coexist with growth in apartment rents, especially in economies that enjoy positive employment trends," Mejia said.

Likewise, the trend of investors showing increasing interest in buying single-family units for re-deployment as rentals also has the potential to affect the apartment market, Mejia added.

"These single-family units are not perfect economic substitutes for apartments," Mejia explained. "For one, they typically serve the needs of larger households who may have already owned a single family home and would not necessarily consider renting an apartment.

Single_family rentals could actually serve as a complements to traditional apartment rental options, especially in markets where the transition from renter to homeowner appears to take longer, he added.
February 4, 2013

Banks Expect to Lend More in 2013

The outlook for conduit lending activity is improving, and with good reason. CMBS issuance in January hit its highest monthly level since December 2007, supported by increasingly stable corporate and real estate bond markets. The need for credit in support of pending refinancings is concentrated in segments of the market that are not well served by stalwart life companies or the largest banks. Whether to meet these demands or to facilitate new transaction activity, the current revival of securitization is none too soon in coming.


As CMBS volume rises, there are indications that credit quality is coming under pressure. Property economics are mixed, but the supply of credit is picking up while interest rates still linger at historically low levels. Only a minority of market participants believes that systemic distortions from monetary policy may now be doing more long-term harm than good in commercial lending markets. I count myself among this group, but readily acknowledge that the weight of policy opinion is against me.

For all the attention given the CMBS market, banks still account for the majority of commercial real estate lending. For most conventional development projects, they are also unchallenged as the mainstay of construction lending. Not every bank is a commercial property lender, nor has every bank in the sector reengaged. Like their counterparts lending in service of the conduit, however, banks and other balance sheet lenders anticipate rising volume in 2013.


The outlook across banks and CMBS lenders is not always in alignment. Conduits and banks do not exhibit a complete overlap, either in the profiles of their borrowers, their incentive structures, or the market and regulatory environments in which they operate. This heterogeneity is overlooked sometimes in the mass-market discussion of property lending, but is a real feature of the market.


Those differences notwithstanding, banks anticipate originating a larger volume of loans in 2013. Just released by the Real Estate Lenders Association (RELA), the Q4 2012 RELA/Chandan Survey of Commercial Real Estate Lender Sentiment confirms that expectation. More telling, respondents to the survey – who are overwhelmingly balance sheet lenders – indicate that volume will rise because of stronger loan demand by borrowers who meet their still-conservative underwriting standards.

Fast-Food Buildings Beating Bonds Spurs Deal Surge