Archives for February 2015

Raymond Torto, Harvard University lecturer and recently retired CBRE global chief economist, and Douglas Poutasse, executive vice president and head of strategy and research at Bentall Kennedy, cited three positive real estate trends in their remarks at the Counselors of Real Estate annual convention in Boston last fall.

• Foreign investors continue to look favorably at the U.S. “They are taking a longer view, more than the traditional five-to-seven year outlook,” said Torto.
• Workforce housing is both a need and a driver in many markets, according to Poutasse. Both he and Torto cited examples of affordable housing built near medical centers such as the Cleveland Clinic in Cleveland, Ohio, and near the tech industry in Austin, Texas, as key to driving real estate growth in those markets. In particular, today’s workers look for housing that eliminates or reduces commute time — opening up new potential locations for new condo and multifamily development.
• Secondary cities with direct flights to major cities are prime candidates for growth, according to Torto. “International airports bring in capital,” he said, explaining that foreign investors are more likely to invest in cities they can easily reach by air.

2015 Property Snapshots
With the capital markets back at 2006 levels and a growing economy, Cassidy Turley’s U.S. property market forecast portends healthy times ahead for the major property sectors. Multifamily: While vacancy rose in 3Q14 for the first time in this cycle, demand remains strong from 85 million echo boomers in the market. However, the delivery of 443,000 new apartment units in the next couple of years will push up vacancy to “5.3 percent by the end of 2016, and rent growth will soften to 2 percent during this period.” Industrial: “Ecommerce fulfillment centers have accounted for 45 percent of the industrial market’s net absorption since 2011. … In terms of demand, the industrial sector will flirt with record-setting territory in 2015 and vacancy will drop below 7.5 percent by year-end. Industrial rents will soar next year.” Office: “Strengthening job trends indicate that pent-up demand is rising beneath the surface. … Most firms have outgrown their current space. This, in combination with the stronger job numbers, leads us to believe that net absorption will go from modest to robust in 2015.” Retail: “To characterize the retail sector as weak would be inaccurate; it is simply all over the map. Retail will remain a tale of multiple stories with one general theme: the closer to the core of the city, the better the retailer will perform.”

Briefly Noted
Hotel — New York, Houston, Washington, D.C., Los Angeles, and Miami top the lodging pipeline as of 3Q14, according to Lodging Econometrics, with Houston showing the largest YOY increase in rooms at 41 percent, followed by Miami at 38 percent. The pipeline includes projects in the early planning stages, scheduled in the next 12 months, and those already under construction. Projects under construction have increased the most in the past year, up 50 percent YOY, as developers take advantage of near-perfect conditions for new supply.
Industrial — Warehouse remains the top investment and development property choice of Emerging Trends in Real Estate 2015 survey respondents, according to the report. Favored cities include Nashville, Tenn., St. Louis, Charlotte, N.C., and Louisville, Ky., because “you can build industrial in these markets and get good returns.”
Multifamily — Vacancy rates are expected to reach 4.3 percent by 4Q15 up from 4.0 in 2014, according to Laurence Yun, National Association of Realtors’ chief economist. Areas with the lowest multifamily vacancy rates currently are Orange County, Calif., and Sacramento, Calif., at 2.2 percent; Providence, R.I., and New Haven, Conn., at 2.3 percent; and Hartford, Conn., at 2.5 percent. Still considered a landlord’s market, apartment rents should rise 4.0 percent in 2014 and 4.1 percent in 2015.
Office — Eight msf of medical office space was brought on line in 2014, up from approximately 6 msf in 2013, according to Marcus & Millichap. While newer properties capture new tenant demand, older buildings remain popular, particularly those built in the 1990s, which average 8.7 percent vacancy, compared with a national average of 9.9 percent. Pre-1990s properties’ vacancy is “more likely to soften further in years to come amid ongoing healthcare industry consolidation and accelerating physician retirements.”
Retail — Retailers are converting bricks-and-mortar stores to concept stores, blending physical inventory, online access, and experiential retailing, according to the Deloitte’s 2015 Commercial Real Estate Outlook. This translates into increased technology demands from retail tenants, as they redesign to meet the technology needs of today’s customer.
By: Commercial Investment Real Estate
Click here to view source article.

“Price is what you pay; value is what you get.” — Warren Buffet
As we look to 2015 and beyond, the commercial real estate market is enjoying much positive press and continues to be a favored asset class relative to stocks, bonds, and cash. After the most recent commercial real estate downward cycle in third quarter 2008, followed by a rebound in 1Q10, we are at a new crossroads where prices are clearly outpacing valuations. This is the final phase of our up cycle, and the key question is, how long can this phase run? When we think about investments and investment cycles, we are coming to realize that the more things change, the more they stay the same. In other words, be worried when the market starts to say, “This time it is different.”
Economic Fits and Starts
In our search for how prices and values are aligning themselves, we first need to examine the economy. The outlook for the U.S. economy is much brighter than it has been since before the Great Recession. Besides more than 3 percent growth in gross domestic product in 2Q14 and 3Q14, inflation remains low and the unemployment rate declined to 5.8 percent in October 2014. In fact, job growth has improved enough that employers are on pace to add the most jobs on an annual basis since 1999, according to the Bureau of Labor Statistics.

However, a variety of headwinds is still holding back the progress that many economists had been predicting, with each setback causing forecasters to recalibrate their expectations. These recalibrations have been triggered by a workforce participation rate that has declined to 1978 levels, as the wages of the majority of workers remain relatively stagnant. In addition, the federal debt has ballooned to nearly $18 trillion, while major entitlement programs are underfunded. The housing sector has improved slightly, but the young adults we have relied on in the past to purchase homes are burdened with oversized amounts of student debt. Furthermore, many of the economies in Europe and Asia are contracting, and territory disputes from the Ukraine and Russia to Iraq and Syria have given rise to new acts of terrorism. However, in the end, the U.S. economy appears to have many resilient elements in place to withstand future disruptions in the financial markets.
Each quarter, Real Estate Research Corp., a Situs company, surveys some of the nation’s leading institutional investors about the economy and reports this information in the quarterly RERC Real Estate Report. As demonstrated in Figure 1, commercial real estate has been consistently rated higher than the alternatives, even as the economy has been recovering.
Flush With Liquidity
Despite the macroeconomic uncertainties, the global and domestic markets have provided investors more capital than they know what to do with. With investors searching for a place to park this capital (with good risk-adjusted and safe returns), the result has been asset prices pushed to all-time highs — which is making the market nervous. We see this in the stock market, with record-high performance, and we see it with commercial real estate, which, with its attractiveness as an asset class, including return performance, ability to hedge against inflation, and tangible nature, has attracted a great deal of capital.

Put stocks and real estate together and you get an idea of just how much in demand these two asset classes are. According to Bloomberg, investors are rewarding retailers’ efforts to spin their properties into real estate investment trusts. Sears Holdings recently announced plans to create a REIT for its properties, and shares increased 31 percent.
RERC also examines the amount of capital available for investment and compares it to the underwriting discipline. As shown in Figure 2, investor ratings for capital availability have greatly outpaced the discipline (or underwriting standards) for capital in 3Q14. It is worth noting that the last time the availability of capital outpaced discipline to this degree was in 2Q07 — shortly before the credit crisis that preceded the Great Recession.
The comparison of the availability and discipline of capital shows that we are again at an inflection point. The flood of capital chasing commercial real estate continues to pressure property prices to increase, especially for high quality assets in top markets. Some investors have noted that, given high prices, there is already too little product to invest in, which further drives prices higher and returns lower.

However, RERC expects values and prices to continue to increase as long as interest rates stay low. If RERC’s history of availability of capital versus the underwriting discipline holds up, this bull commercial real estate market has another 18 to 24 months to run. This is not to say the market is right, but it is the market.
It All Depends on Interest Rates
Although the Federal Reserve has concluded its recent quantitative easing program, monetary policy remains accommodative, with the federal funds rate remaining at 0 percent to 0.25 percent for “a considerable period of time.” The Fed’s target unemployment rate has been reached, but its target inflation rate is elusive, and growth remains slower than expected.

The market and most investors anticipate that the Fed will raise short-term interest rates in mid-2015, stating that it is too risky for the Fed to leave rates at current record lows much longer (in case the rates need to be lowered again when there is another recession). Others believe that the Fed will leave the funds rate very low for several years due to global pressure, as troubled economies in the rest of the world would be forced to pay higher interest rates.
As shown in Figure 3, risk-free rates in other developed economies have followed the U.S. trend to keep rates low, and as shown in Figure 4, 10-year Treasury rates have been declining for several decades. Despite the Fed’s clear message about their intent to increase U.S. Treasury rates at some point, some investors have become complacent, expecting Treasury rates — as well as interest rates — to stay low for much longer. Continuing low interest rates will be another significant benefit for commercial real estate investors.
Value vs Price
As long as Treasury rates and interest rates remain low, the global investment environment for commercial real estate will be very attractive. Investors will continue to purchase real estate, prices will continue to increase, and values will continue to chase prices, as capitalization rates on a broad market perspective will further compress.

As shown in Table 1, RERC’s value vs. price rating for commercial real estate overall dipped slightly to 5.3 on a scale of 1 to 10, with 10 being high, during 3Q14. However, with the midpoint of the rating scale at 5.0, a rating of 5.3 indicates that value vs. price can still be found in commercial real estate overall, despite the slight decline in this rating during the past few quarters.

On a property sector basis, the value vs. price rating increased for each of the sectors (except for the hotel sector) during 3Q14. As shown, the industrial sector retained the highest value vs. price rating among the property types. However, all sector ratings were higher than the midpoint of 5.0, which means that prices still have room to climb before properties become overpriced (compared to their value) — at least as long as interest rates remain low and cap rates have room to further compress.
A Closer Look at the Property Types
Additional Considerations
As 2015 continues, commercial real estate investors are encouraged to keep in mind the following points:

• The U.S. economy is resilient and will survive a looming short-term rate correction. In the long term (toward the end of the decade), the economy is positioned to demonstrate above-average growth.
• Global pressures will continue to keep 10-year Treasury rates below 3.0 percent in 2015.
• Commercial real estate will be a preferred asset class in 2015 relative to stocks, bonds, and cash, and this will continue to put upward pressure on prices and values throughout the U.S.
• Commercial real estate space fundamentals will continue to improve slightly, except in the multifamily sector, where vacancy is increasing due to supply additions.
• Required total returns and capitalization rates for the broad commercial real estate market will continue to compress in 2015, as long-term interest rates stay low.
• RERC’s total return expectations based on our value forecast and income forecast reflect a total return in the low teens for unleveraged commercial real estate assets, and a total return in the mid-teens on a leveraged basis for 2015.
• An increasing number of alternate property types (beyond the core property types) will continue to attract investors, including storage facilities, single-family housing, student housing, seniors housing, and medical office buildings.
• There will be continued expansion of investment products and opportunities for retail investors through private real estate investment trusts, single property-REITs, club investing, and defined contribution options.
• The market cycle is not different this time, but commercial real estate will see another strong year in 2015, only to be faced with another market down cycle looming out past 2015.

Office. The office market continues to struggle. The vacancy rate was 16.8 percent in 3Q14, which was only 10 basis points lower than a year ago, according to Reis. Despite that, effective rents increased 2.7 percent to $23.94 per square foot year over year. In addition, according to Real Capital Analytics, 12-month trailing transaction volume increased more than 27 percent to $121 billion in 3Q14 compared to the previous year, and prices psf increased by 6 percent to $245. RERC’s required pre-tax yield rate (internal rate of return) dipped to 7.9 percent, and the required going-in cap rate decreased to 6.1 percent in 3Q14. Figure 5 illustrates the spreads between RERC’s required pre-tax yield rates and going-in cap rates and 10-year Treasurys. Vacancy is expected to drop to 16.3 percent and rents to increase 3.7 percent by the end of 2015, according to Reis. Some metros are expected to outpace expectations, such as Portland, Ore., with stagnant cap rates in the office market, and Minneapolis, which is expected to see slightly higher rental growth than the national average over the next couple years.
Industrial. Vacancy in the industrial sector decreased to 9.0 percent in 3Q14, according to Reis, and was accompanied by effective rental growth of 2.5 percent YOY to $4.45 psf. Transaction volume increased by 6.0 percent, with prices increasing 17.3 percent to $77 psf over the past year, per RCA. RERC’s required pre-tax yield rate for the industrial sector declined to 7.7 percent, while the required going-in cap rate decreased to 6.0 percent in 3Q14. Reis forecasts the industrial vacancy rate to decline to 8.0 percent by 2016, and for effective rent to grow by 3.3 percent. Industrial vacancy is expected to decline even more in some markets, such as Sacramento, Calif., and Orlando, Fla.
Multifamily. The vacancy rate for the apartment sector increased slightly in 3Q14 to 4.3 percent, while the effective rent rose 3.91 percent during the past year to $1,117 per unit, according to Reis. As reported by RCA, 12-month trailing transaction volume increased 6.2 percent YOY to $104 billion in 3Q14, as the price increased 21.5 percent to $128,259 per unit, a new high. RERC’s required pre-tax yield rate declined to 7.0 percent, while the required going-in cap rate declined to 5.0 percent. Reis notes that due to expected completions of 444,000 units over the next two years, vacancy is likely to increase to 4.9 percent in 2015 and to 5.1 percent in 2016, although vacancy in some metros (San Diego, for example) is not expected to increase as much. Effective rental growth of 3.1 percent in 2015 and 2.6 percent in 2016 is expected.
Retail. According to Reis, retail vacancy declined slightly to 10.3 percent in 3Q14, while effective rent increased 1.91 percent to $17.07 psf. Transaction volume increased 8.1 percent YOY, with pricing increasing 24.8 percent to $214 psf, as investors have been purchasing higher quality retail properties. RERC’s required pre-tax yield rate decreased to 7.8 percent in 3Q14, while the required going-in cap rate declined to 6.1 percent, although this has had more to do with abundant capital and easier financing than improving fundamentals. However, Reis projects that vacancy will be 100 bps lower at 9.3 percent and rents will step up to 3.3 percent annual growth in 2016. Retail properties in some metros — especially Florida markets like Miami and Orlando — offer strong investment opportunities due to improving fundamentals.
Hospitality. Smith Travel Research reports that U.S. hotel occupancy rose 3.9 percent YOY to 62.7 percent during the week of November 9-15, 2014. Revenue per available room and the average daily rate increased 8.6 percent to $72 and 4.6 percent to $115, respectively, according to PKF Hospitality Research. Hotel volume increased to $33 billion on a 12-month trailing basis in 3Q14, according to RCA, while the price per unit increased to $154,798. RERC’s required cap and discount rates for this sector decreased more than for any other property type on a YOY basis in 3Q14, as RERC’s required pre-tax yield rate and required going-in cap rate declined by 80 bps to 9.2 percent and 7.2 percent, respectively. PKF predicts that hotel sector occupancy will reach 65 percent in 2015, which would be the highest occupancy achieved since the recording of this rate started. Investment trends for hotel properties seem to be moving further out from core urban areas for example, Long Island, N.Y., versus Manhattan.
Value Expectations for 2015
Commercial real estate is a favored investment alternative compared to stocks, bonds, and cash, especially in these uncertain times. Not only does commercial real estate generate high risk-adjusted returns compared to other investments, property is tangible, transparent, a hedge against inflation, and offers reasonable return performance on capital and income. (Income is currently approximately 60 percent of returns.)
Commercial real estate has more than recovered the value it lost in the Great Recession, as shown in Figure 6, and with respect to return performance, broad market prices and values have room to grow for approximately 12 to 18 months. This does not mean that commercial real estate prices and values are sustainable, but for many investors, there are no other good alternatives, and as a result, many investors will continue to pay nearly any price for the value commercial real estate offers.
By: Kenneth P. Riggs Jr. (Commercial Investment Real Estate)
Click here to view source article.

Seniors housing generated solid returns for investors in 2014. By many measures, the returns were well above those of other investment opportunities. The sector has attracted growing attention from seasoned veterans in the sector as well as new entrants who find the fundamentals compelling and the investment thesis reasonable. A look at the sector’s 2014 performance helps explain the factors that will shape this year’s investment potential.
One-Year Returns
Investors are attracted to seniors housing’s favorable investment return and portfolio diversification attributes. While the data is quantifiable for only a limited number of institutional-quality properties, NCREIF has been collecting income and appreciation returns for seniors housing from its tax-exempt plan sponsors since 2004. The data show that seniors housing returns have been quite strong. In fact, one-year returns for third quarter 2014 were more than 900 basis points higher than for the broad property market tracked by the NCREIF Property Index, or NPI. This equated to a one-year total return for seniors housing of 20.37 percent versus the NPI of 11.26 percent.

The one-year return also compares favorably to stock and bond investments that tallied returns of 19.74 percent for the S&P 500 Index and 2.28 percent for the Barclays Capital Government Bond Index. Longer term, on a 10-year basis, seniors housing has consistently generated strong returns as well, at 15.09 percent.
Seniors housing’s strong performance stems from outperformance for both appreciation and income. On a 10-year basis, the NCREIF index of income return has outperformed the NPI by 131 bps, while the appreciation return for seniors housing has outperformed by 495 bps.
Transaction Activity
The seniors housing property transactions market is very active, with 3Q14 acquisition activity the strongest on record. Nearly $7 billion worth of deals were closed during the 3Q14, up more than 30 percent from the previous high-water mark of $5.3 billion during third quarter 2011.
For comparative purposes, $8.5 billion of hotel deals and $27 billion of apartment deals closed in 3Q14, according to Real Capital Analytics. For the 12 months ending in September 2014, seniors housing investment totaled more than $15 billion, surpassing any four-quarter total on record. Investment activity should close out the year on a high note, as the fourth quarter itself is traditionally strong and two large real estate investment trust transactions, representing nearly $6 billion, are expected to close.
Acquisition activity has been spread across investor types, with institutional, equity, and private investors accelerating investment activity. These investor groups closed roughly 30 percent of the 3Q14 transaction volume by dollar amount. Investors include pension funds, insurance companies, universities, endowments, and high net worth individuals who provide funding to an ever-increasing roster of private equity firms. These firms are specifically targeting seniors housing acquisitions and development opportunities.

However, publicly traded companies still account for the lion’s share of activity, with more than $9 billion in completed acquisitions during the past four quarters, including nearly $5 billion of investment during 3Q14. While $9 billion represents significant investment in the sector, that sum is about 25 percent below the peak rolling four-quarter activity established during late 2012.
The acquisition wave for public companies, particularly REITs, should continue into 4Q14. The two blockbuster deals that are scheduled to close during 4Q14, Ventas’ acquisition of American Realty Capital and NorthStar Realty Finance’s acquisition of Griffen-American Healthcare REIT II, collectively represent $5.7 billion of investment and should propel the rolling four-quarter total for public investors to new heights.
A survey conducted by National Real Estate Investor and the National Investment Center for Seniors Housing and Care among 223 industry participants during mid-summer 2014 further corroborated the appeal of seniors housing to investors. A full 95 percent indicated that 2015 transaction volumes would exceed those of 2014. The majority of survey respondents also believed that both debt and equity capital would be readily available for acquisitions and development.
A separate survey conducted by GE Capital in September 2014 of 150 seniors housing and care executives showed similar results and interest levels. More than three of four persons surveyed expected better business performance in the next 12 months and 56 percent of the survey respondents believed that property valuations are sustainable.
Recession-Resilient?
Certainly seniors housing is not yet considered one of the traditional real estate property types, alongside office, retail, multifamily, and industrial. Nevertheless, it is becoming more mainstream and is now showing up in core real estate funds.
In general, institutional investors’ portfolios encompass a mix of stocks, bonds, cash, and alternative assets. Commercial real estate is typically lumped into the alternative asset bucket and can often generate strong returns for an institutional portfolio. This has been most evident for investors who have participated in seniors housing opportunities, as discussed earlier. Moreover, seniors housing investments offer portfolio diversification benefits, since seniors housing may not respond in the same way as stocks and bonds during swings in business and interest rate cycles.

Seniors housing returns are also often less volatile than that of other property types. Indeed, during the Great Recession, returns for seniors housing, as measured by NCREIF, were less volatile and suffered an outright decline of 6.7 percent over the course of only two quarters versus returns on apartments, which declined 24 percent over the course of seven quarters.  Moreover, real estate can provide a steady income stream from rental income. This economic resiliency is especially true for assisted living properties, where residents often move in out of necessity, regardless of the broader economic environment.
Long-Term Fundamentals
Market fundamentals for seniors housing continue to improve. Occupancy rates in 3Q14 for the NIC MAP primary markets climbed to 90.3 percent, the best showing since late 2007. The 100-bps improvement from the prior year reflected outsized gains in demand (as measured by absorption or the change in occupied stock), which overshadowed inventory growth. On a four-quarter moving average, absorption totaled 13,664 units, a record amount, and well in excess of new supply, which totaled 9,031 units, for the same four-quarter moving average. The differential between record strong demand and new inventory has never been so great.
That said, nationwide there are a number of properties still in lease-up, as well as a number that have broken ground but have not yet been delivered in the primary markets. Combined, this amounts to 321 properties (128 non-stabilized properties and 193 properties under construction) or 29,531 units (11,368 non-stabilized units and 18,163 units under construction). In aggregate, these properties represent an increase in the inventory of units of 5.6 percent. If demand keeps pace at its recent levels, this inventory should be absorbed in a little over two years (new supply of 29,531 units/annual absorption of 13,644 units = 2.2 years).
The delivery timeline will be staggered and will not be evenly distributed across the country. Some properties will reach stabilization quickly. Projects in the pipeline may be accelerated or delayed depending upon the availability and timing of financing, permits, regulatory approvals, and labor and materials costs and availability. With rising construction costs, developers are incentivized to deliver as quickly as possible, although most probably have some type of cost protection in place. Nonresidential construction costs have increased 4.31 percent in the past year, according to the 2Q14 Turner Building Cost Index. The increase was due to rising labor costs and costs of manufactured and engineered construction components; raw material prices remained flat.
NIC projections for the next 12 months suggest that demand will continue to outstrip completions, allowing further occupancy gains. For seniors housing properties where the majority of units are independent living, occupancy is projected to rise to 91.8 percent in third quarter 2015 from 90.9 percent in 3Q14. For properties where a majority of units are assisted living, occupancy is projected to increase to 89.8 percent from 89.4 percent. This will be the highest occupancy rate for majority assisted living since near the start of the recession in early 2007. Note that, over the next year, the 90 bps improvement projected for majority independent living far outpaces the 40 bps improvement in occupancy for majority assisted living. This means the average occupancy level for majority independent living properties will be a full 200 bps higher than majority assisted living.
The 2016 and 2017 periods will also be affected by properties just recently started or those started in 2015. In 3Q14, starts totaled 2,795 units in the primary markets, a slowdown from 2013 when 3,600 units were started. Anecdotal observations and comments from the October 2014 NIC National Conference as well as ongoing discussions with operators and capital providers suggest that many are contemplating development; however, these projects don’t yet show up in the NIC starts data.
Developers favor the sector for several reasons, including the strong market fundamentals just described, as well as the favorable development return projections relative to other property types and acquisition returns. Moreover, replacement costs or those associated with the construction of a new state-of-the-art property are often lower than those associated with acquiring an existing property.
With the talk of development picking up, there are concerns that supply may outstrip demand and that market fundamentals may deteriorate. While this is certainly possible, today’s pipeline indicates that the risk of hyper-supply at the national level is not yet evident. Moreover, capital providers may constrain development to some degree as better seniors housing data improves their knowledge of market fundamentals and transactions activity. This in turn has improved due diligence and underwriting, thereby potentially limiting some development activity that may appear excessive. Such a trend emerged in the multifamily sector to some degree, which is ahead of the seniors housing sector in its development cycle.
The Threat of Oversupply?
There are some seniors housing markets that will be tested in the next 24 months if supply begins to outpace demand. In Houston, for example, there were 2,130 units of seniors housing under development as of 3Q14 (equivalent to 14.2 percent of its existing inventory, second to San Antonio with 16.1 percent and compared with the primary markets with 3.4 percent). In addition to these units, there were also 775 units in 11 properties that recently opened that have not yet stabilized. Combined with the units under construction, 2,885 units of new inventory will be introduced in the metropolitan area in the next two-plus years — equal to all the units developed in Houston since 2007. However, Houston has been able to absorb more than 1,000 units of new supply in the 18 months since early 2013, when its occupancy rate was at a cyclical low of 84.7 percent. Currently its occupancy rate is 88 percent, the highest since 2008 and near its long-term average rate of 87.7 percent. (Note that Houston tends to have a lower average occupancy rate than the average primary market occupancy rate of 89.1 percent.) At its current run-rate of absorption, it will take Houston roughly three years to fully absorb the new supply. With its strong economy, fast pace of job creation and significant in-migration of new residents, Houston will be a very interesting market to watch.
What Could Go Wrong?
While the outlook for seniors housing investments looks generally promising, there are factors that could alter this expectation. Among these are rising interest rates, which will raise the cost of capital for borrowers as debt providers are forced to respond accordingly. Higher interest rates may also push up capitalization rates and potentially hurt investors’ returns. The economy is approaching its sixth year of expansion. At the same time, the Federal Reserve is gradually moving away from its accommodative monetary policies, as evidenced most recently by the end of its quantitative easing programs. And it’s likely that the Fed’s stance toward a zero interest rate policy will end sometime in 2015. As all of this occurs, there will be upward pressure on cap rates for all property types. If net operating income growth cannot offset this pressure, values may decrease.

Property location may also influence return performance. In markets where there are limited barriers to entry and few regulatory restrictions on growth through tough entitlement and zoning processes, or restriction on growth due to physical barriers, occupancy rates may slip as new units are fully integrated into the market.
Third, there may not be enough transaction opportunities for the robust buyer interest that exists today. Indeed, by some measures, there is a limited amount of product being offered to buyers today. And when properties and/or portfolios are brought out to the market, buyer interest is very strong and competition from interested investors may push prices out of reach for many potential investors. Such a competitive landscape also raises the risk of overpriced property.
Lastly, there is a risk that property-level NOI growth could slow if the macro economy slows for an extended period. External shocks to the national economy could surface from a further slowdown in Europe, China, or Japan, or further U.S. military involvement in wars. The long-term risk of a spike in oil prices is presently less likely, given the recent drop in oil prices to below $80 per barrel.
A Competitive Landscape
Cap rates continue to compress for seniors housing properties. Strong investor interest and a compelling investment thesis have led to a very competitive landscape with many potential buyers being bid out of the market entirely. With the very strong likelihood of rising interest rates in the next six to 12 months, there is considerable risk that today’s record low cap rates may follow interest rates higher, at least to some degree. With its compelling investment thesis, however, it’s reasonable to argue that cap rates for seniors housing may be sticky and not follow interest rates higher in lock-step.
To sustain values, operators will increasingly have to grow NOI and maintain margins through higher occupancies and rents. This will be particularly important and challenging for those operators who may be affected by higher minimum wage levels or higher electricity prices, especially those situated in the Northeast. Large operators who can create economies of scale may be better positioned to face these threats. However, now more than ever, quality settings, quality care resulting in quality outcomes for residents and value will be the real differentiators that distinguish the top performing properties in an increasingly competitive landscape.
By: Beth Burnham Mace (Commercial Investment Real Estate Magazine)
Click here to view source article.
 

The combination of ongoing weak GDP growth and a steep rise in corporate inversions designed to reduce US corporate tax liabilities has again brought the perennial idea of tax reform to the fore. Done right tax reform is a winner. By closing loopholes and lowering marginal rates the economy can better perform and GDP growth can be raised. That said, despite the positive rhetoric coming out of Capitol Hill, don’t count on it soon. Moreover, the sharp, and short-lived seven day brawl about scaling back tax breaks for 529 college savings plans is painfully instructive and illustrative as to why.
In his State of the Union address, President Obama proposed doing away with the tax-free treatment of capital gains in 529 college savings plans. Instead, he proposed increasing the size of the American Opportunity Tax Credit, available only to families with pretax incomes of less than $180,000, from $1,000/year to $1,500/year and to allow it to be used for five years, up from four.
Looked at in isolation, the economics behind this particular policy is pretty solid. First, there is limited evidence that tax breaks designed to increase savings actually do so. Rather, the evidence generally finds that tax breaks reward individuals who would have saved anyways. Worse, the tax incentives don’t seem to increase the total amount of savings either!
Second, most of the tax shelter goes to higher income households. According to the White House, 70% of the benefits from 529 plans go to households with incomes greater than $200,000, while a GAO study from 2010 found that 47% of families with a 529 plan had incomes above $150,000. A recent College Savings Foundation study found that not quite 10% of 529 account holders have household income below $50,000. In short, these plans give tax breaks to wealthier households who already send their kids to college and would have saved as much with or without the plan. By contrast, giving all households with incomes below $180,000 slightly more money for college might raise the percentage of kids from middle- and lower-class households that attend college.
More concerning is that be it via 529 plans, the American Opportunity Tax Credit, guaranteed student loans and now increasing student loan forgiveness, government, through the tax code and elsewhere, heavily subsidizes college costs, and in the process dramatically inflates the cost of college tuition. Real tax reform would scrap these inflationary subsidies and implement a more coherent and more focused approach.
But here is the rub, taking away the advantageous tax status of 529 plans created an instant coalition of three powerful groups that rolled the administration. The groups included parents with kids bound for college fearful they were about to lose a valuable tax break that they “deserved,” higher education that was concerned it was losing a subsidy and the financial industry which feared losing the billions in fees associated with administering a huge $250 billion program.
While everyone claims that they want a simpler tax code with lower rates and bereft of deductions, loopholes and credits, taking any of these away creates winners and losers. And while the winners may be numerous, what they stand to gain is nebulous and distant. By contrast, losers quickly organize themselves and make themselves heard. If doing away with something as small as this was impossible, good luck with larger tax issues that touch deeper pockets.
By: Elliot Eisenberg (Graphsandlaughs.net)
Click here to view source website.