Investment Rising Rapidly in Age-Restricted Housing

Seniors housing & care is the largest “alternative” asset class based on investment volume over the past decade. Investment in the sector has been particularly robust over the past six years.

Annual buying activity from 2014 through 2018 averaged $17.5 billion. Investment in 2019 is on pace to reach at least $15 billion.

In 2018, acquisitions fell 7.7%. The year-to-date 2019 total slipped 6.2% from the prior year. Interest may have waned somewhat from seniors’ yield premium coming down and from overbuilding concerns (though construction has slowed considerably).

The larger driver for the slowdown in acquisitions activity is likely limited available product to buy, both individual assets and portfolios.

Investment is still relatively small in the 55+/active adult sector but rising rapidly according to Real Capital Analytics’ data, which covers all types of age-restricted income-producing properties, including active adult.

Acquisitions exceeded the $1 billion mark first in 2014 and reached $2 billion in 2018. Last year’s rise over 2017 was impressive at 13.7%.

Buying activity remains robust in 2019, and sales are on pace to exceed 2018’s total by a sizeable margin.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Construction Momentum Varies Greatly Across U.S.

Multifamily development is still very active nationally and close to peak levels.

Completions of 259,600 units in the four quarters ending in Q2 2019, however, represented a 9.7% decline from one year ago. While the 259,600-unit total is the lowest four-quarter total in three years (since Q3 2016), it is still 7.5% above the five-year average.

CBRE Econometric Advisors forecasts the four-quarter trailing totals to rise over the second half of 2019 and first half of 2020, reaching a new peak for this cycle of 330,200 units in Q2 2020. After that, CBRE EA projects completions to slowly decline.

While I generally agree with this outlook, I expect the second half of 2020 to remain at peak levels of deliveries given the active development pipeline and only modest decline in construction starts this year. Completions should then slow in 2021.

Construction momentum varies significantly by metro, however. The extent to which industry players should be concerned about completions and potential oversupply varies greatly by metro (and by submarket).

Completions Close to Stable Across Tier I Markets

Tier I markets, as a group, had the smallest year-over-year decrease of multifamily completions among the three tier groups (-3.5%).

Construction slowed more noticeably in Tier II and Tier III markets, overall, with completions declines of 13.0% and 15.5%, respectively.

However, within all tier groupings, the markets exhibited significant variation.

Inland Empire & Seattle Lead for Largest Unit Gains

For the 66 markets analyzed, completions for 22 markets were higher on a year-over-year percentage basis for the year ending in Q2 2019, one-third of the total.

Another 32 markets had lower levels of multifamily deliveries. Completions were essentially stable in 12 markets.

Among all markets, absolute gains on a year-over-year basis were largest in Seattle (3,400 units), the Inland Empire (3,300), Tampa (2,400), Philadelphia (2,300), Miami (1,900) and Portland (1,700).

The largest percentage increases in multifamily unit completions among Tier I and II markets were in the Inland Empire, Ventura, San Jose, Tampa and Philadelphia. All of these markets experienced increases of 60% or more.

The leading Tier I and II metros for declines in deliveries were Orange County, San Diego, Baltimore, Nashville, Houston and Dallas, all with declines of 35% or more.

For Tier III metros, Birmingham, Colorado Springs, Hartford, Jacksonville and Detroit experienced the largest percentage gains. Many of the gains, however, were off a very low base, but are notable nevertheless.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Vietnam’s Value in Supply Chains

The economy of Vietnam has arrived on the global stage.

The drivers are due to a diversity of factors. On one hand, it has benefited from global geopolitical friction and macro shifts. On the other hand, consistent investment in and diversification of its manufacturing capabilities have vaulted Vietnam as a core market within many corporate strategies.

As a result, Vietnam has emerged as a visible and more sustainable component of the global supply chain.

A knock-on effect of manufacturing and supply chain maturity inevitably rises in industrial land prices and warehouse rentals. Vietnam has been no exception. This trajectory shadows a growing trend of multinationals committing to investments, both for manufacturing purposes and for market penetration. Add recent geopolitical tensions to the mix and the commonly held belief that Vietnam is emerging from trade conflicts as a “winner”, one must consider whether the initial drivers will ensure companies remain invested In Vietnam.

Basic economics have dictated the shift of labor out of established markets like China into nearby emerging manufacturing champions, like Vietnam. Between 2016-2019, the hourly wage for manufacturing jobs in Vietnam has consistently hovered at around half of the hourly wage for the same sector in China. (Source: Statista). The surge in foreign direct investment resulting from this mismatch has also led to an increase in the demand for I&L property in three clusters in Vietnam, Hanoi/Haiphong, Central and Greater HCM.

Looking back several decades shows the scale of change in industrial real estate. In 1986, there were just 355 hectares of land in Vietnam for industrial park use. By comparison, in 2018, this base has grown to 80,000 hectares.

The immediate opportunities are clear for international investors concerned with deal size and requisite yields.  Where land costs in core Chinese cities have reached $180 per square meter in Vietnam, industrial sites are already typically ranging between $100-140 per square meter.

Furthermore, the average land rental is increasing 5-8 per cent in Vietnam, according to CBRE Research. By contrast to this more modest price rise, rentals in Vietnam’s industrial parks, especially those in strategic locations connected to and in close proximity to key infrastructure, are surging.

However, the market for industrial and logistics assets in Vietnam remains somewhat nascent. From where we stand, the immediate room for growth is in providing value-added manufacturing and services. As its technical expertise enhances over time, companies are now vying to capture growth in this market and take Vietnam’s industrial and logistics value chain to new heights.

Where to start though? No dialogue about the industrial real estate market in Vietnam is complete without acknowledging the growing automobile industry. Arguably the bedrock of the economy, the automobile sector reflects all that is going well in the local economy. Growing average income levels, coupled with stability in both GDP-growth and inflation, have translated into high demand for automobiles.

This theme has resulted in increased demand for industrial land. While domestic automobile manufacturers and assemblers have faced speedbumps to growth, recent policy changes by the government to enhance standards for manufacturing, car repair and factories have helped Vietnam remain competitive amongst its regional peers, particularly Thailand and Indonesia – in turn spurting the growth in industrial and commercial land leasing deals.

Already, the industrial and logistics segment in Vietnam’s commercial real estate market is being divided into a two-speed market – in Ho Chi Minh City and Hanoi, and the rest of the country. As most occupiers are looking for high quality industrial facilities in prime locations, top tier industrial parks are experiencing approximately 80% occupancy, while facilities in other locations are at roughly 50% occupancy. By virtue of its promising domestic market and development of manufacturing, distribution, exports and imports, this is and will continue to be a market that investors pay close attention to. Leading the influx of capital into Vietnam are Japanese and South Korean companies (think Panasonic, Bridgestone, Samsung, LG), embracing the region’s increasing interconnectedness.

The auspicious place Vietnam has in the region for industrials and logistics will not be cemented without it making significant advancements, though. The dialogue on technological disruption in industrials and logistics, and, arguably, all sectors, will serve as a challenge for a country that has not fully submersed itself in the age of automation.

Currently, many factories and logistics firms still lag global peers in terms of the robotics and labor used. As innovation and technology are weaved deeper into supply chains, and with Industry 4.0 establishing a foothold, it will be worthwhile to upskill the labor pool – perhaps through governmental initiatives, to bolster Vietnam’s ascension in the value chain.

With 97 million people in pursuit of a higher standard of living, Vietnam should not be overlooked merely as an up and coming world factory following in the footsteps of China or a stopgap on the sidelines of geopolitical wrangling. Large conglomerates have eyed the large population as an opportunity to tap into a new market. As Southeast Asia’s rising star embarks on its journey of upgrading its infrastructure and talent pool, what we expect to see is not an exodus of firms in China but an emboldening of the “China +1” model, which is already bearing fruit.

Perhaps the bigger question facing Vietnam’s industrial space is competing with its ASEAN neighbors for global investment. Indonesia, the Philippines and Thailand have all made strides in recent years. Indonesia is currently embarking on a well-publicized infrastructure spend, in line with the new mandate of President Joko Widodo, while Thailand is well established in manufacturing supply chains like the auto sector. 

All in all, plenty of competition will greet Vietnam’s rise as a global player in the industrial supply chain, but initial fundamentals and clear investor interest have ensured that the market is currently on solid footing and will continue to flex its credentials internationally.

By Troy Shortell, Executive Director, A&T Supply Chain Advisory, Asia.

Tier II Multifamily Markets Draw Investors

Tier II markets experienced the largest increases in multifamily investment this year through July.

Tier II acquisitions totaled $37.4 billion, up 18.5% from the same period last year, with Houston and Raleigh the investment growth leaders

Investment in Tier III markets rose 5.9% year-over-year, with Tier I investment climbing 2.4%

New York led the U.S. for multifamily acquisitions with $7.9 billion or 8.4% of the U.S. total. While impressive, New York’s volume fell 13.1% year-over-year. Southern California (Los Angeles, Orange County, Inland Empire) had the second highest total of $5.9 billion. This total also represented a decline (-14.5%) from the same period in 2018.

Actual or anticipated changes in rent control regulations have impacted investor sentiment. The uncertainly surrounding the regulations are further contributing to keeping some investors on the sidelines. However, investment in San Francisco rose year-over-year, so other forces are also at play, including product availability.

Dallas/Ft. Worth stayed in third place with $5.2 billion, up slightly from the prior year. Following close behind were Washington, D.C., Phoenix and Atlanta all with double-digit increases. The top six metros combined represented over one-third of all acquisitions year-to-date 2019. Half of the volume was represented by only 10 metros.

Among Tier I markets, Boston led for investment growth (65.4%). However, Boston’s total was moderate at $1.9 billion. Seattle had the second highest year-over-year gain (45.4%) followed by the San Francisco Bay Area (33.8%).

For Tier II markets, Baltimore experienced the largest increase (128.8%) followed by Tampa (45.1%) and Austin (42.5%). Las Vegas had the highest total among Tier III markets$1.9 billionand a sizeable 52.3% gain.

Tier II Metros Achieve Highest Gains

Multifamily investment climbed the most in Tier II markets, rising 18.5% over the prior year. Investment in the Tier III markets rose by 5.9%, double that of the investment gain in Tier I markets.

Most of the 16 Tier II markets have been experiencing very strong demand growth and sustained favorable market performance even with robust construction pipelines. While capital is not shying away from Tier I markets (largely the gateway markets plus Seattle, Miami and San Diego), it is showing a preference for these larger dynamic non-gateway metros.

Nearly 25% of Units Acquired in Only Four Markets

Nearly one-quarter of all units acquired year-to-date were located in four Tier II metros: Dallas/Ft. Worth, Atlanta, Houston and Phoenix.

Tier II metros collectively captured the largest market share of units acquired41%. Furthermore, more than half of the top 20 metros by unit count were Tier II markets, providing additional evidence of the attractiveness and importance of Tier II markets.

Investment Patterns to Stay on Current Course

Through the balance of 2019 and into 2020, Tier II metros should continue to attract a disproportionate share of capital. Most Tier II markets are sizeable, are experiencing high levels of market demand and have good product availability. Capital which had once gravitated primarily to Tier I markets will continue to explore Tier II opportunities.

Tier III investment should also continue to rise. While there is less product availability in many of these markets, most have favorable market performance and offer some yield premium thereby making them attractive including many that had not formerly considered smaller markets.

Investment activity in Tier I markets will also remain a centerpiece of the investment story through the balance of 2019 and into 2020, even if year-over-year increases are muted. Tier I markets benefit from having larger assets (important for buyers needing scale) and from improvement in market performance in their urban cores.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

The Koreans Have Arrived!

In global commercial real estate markets, Korean investors are hardly bit players.

In recent times, it’s the opposite, establishing themselves as bona fide participants in cross-border investments.

In real estate circles, the rise is often discussed as a rapid emergence. Looking closer, the fundamentals driving the offshore push by Korean investors ensure that this development isn’t entirely surprising.

Among Asian economies and commercial real estate markets, Korea is one of the most advanced as measured by research and development, broadband connectivity and speed and digital innovation.

Commercial real estate-wise, the market reflects the broader status of the economy. Seoul is one of the most highly urbanized cities on the planet, home to three sizable central business districts, one of the world’s benchmark e-commerce sectors, a sophisticated urban infrastructure and numerous sustainability and green city projects. And domestic investors have been front and center within the development of the economy, the infrastructure and from where we stand, the commercial real estate space.

Given their onshore success, and not to mention, deep pool of capital, Korean investors have long coveted a more conspicuous role in global real estate. And over this last few years, they’ve achieved this goal.

Opportunities in Korea have become sparser, coupled with the fact that major institutional investors have seen assets under management surge and investment strategies pivot towards offshore diversity. But what is truly amazing about the entrenchment of Korean investors in global commercial property is not only the pace of deployment but the diversity of deployment, particularly in the UK and Europe.     

Firstly, no conversation about Korean offshore investors can exist without the National Pension Service (NPS) fund. With $600 billion in AUM, the NPS is the third largest institutional investor globally and unsurprisingly, the first mover to invest overseas real estate.

The NPS initiated their first global real estate investment before the global financial crisis. At that time, they started with investments via funds and separate accounts but followed with a direct investment in 2009 – the HSBC Headquarters serving as a primary example. 

Significantly, the NPS’ strategy is long-term in nature. By playing the long game, their status as one of the markets most sophisticated investors has gained credibility, reinforced by their understanding of market cycles. At the time of writing, their focus has been major cities across global gateway cities, including London, Frankfurt, Tokyo, Singapore and Sydney.

The second wave is the Korean insurance companies, among Asia’s largest measured by both assets under management (AUM) and premium income. Like many before, the offshore ambitions of conservative investors like insurance companies follow the large national institutional investors.

In this case, Korean insurers studied the success and deployments of the NPS when investing overseas for diversify their portfolio. They also received regulatory assistance along the way. The Financial Services Commission (FSC) of South Korea simplified the approval process for foreign real estate investment by insurance companies in late 2013. As a result, investors like insurers would only be required to register their forecast property purchase.

Insurers have taken a different investment route to the behemoth NPS. They have favored co-investment or club deals in their overseas investment, compared to other Asian capital, attracted by the structure that enables investors to diversify and reduce transaction and management costs.

Furthermore, they often team-up with other Korean institution investors (either pension funds or other insurance companies) via Korean asset management companies but also invested with other Asian institutions. Examples include Hanwha Life Insurance’s co-investment with China SAFE and AXA real estate to acquire Ropemaker Place in London for £472 million (US$716 million) in Q1 2013. This transaction, along with others, demonstrates, that Korean insurance companies prefer to invest directly as they were less willing to invest into co-mingle funds.  

More recently, a third wave of Korean capital has arrived. The capital pool has expanded to include not only pension funds and insurance companies, but also Korean banks, securities companies and conglomerates known as Chaebols to invest overseas through their balance sheet.

In addition, some Korean asset management companies have expanded to form syndicate to allow Korean individual investors to gain overseas exposure. They form investment trusts and are open for private investors to commit capital. Such an arrangement expands the buying pool further to private investors to invest overseas, supporting the influx of Korean capital in markets like the UK and Europe.

Bringing it all together, more Korean investors, coming from the institutional, insurance and financial services space, translates into more deployment diversity. And we’re now seeing the fruits of this push.

More recently, Korean investors have demonstrated a willingness to invest outside the traditional European gateway cities. Between 2017 and 2018, they mainly focused on UK and Germany, which accounted 67% of total Korean cross-border investment in Europe.

Due to the higher competition for good quality assets in both countries either from local or foreign investors, they have widened the net. Increasingly, Korean transactions have closed in European markets like France, Czech Republic, the Netherlands, Belgium and Ireland. The drivers? Higher yield offerings, less intense competition and hedging cost premium to support Korean investors to invest across the European markets.

We expect Korean capital will remain active in overseas investment as they can take advantage of the current hedging premium in Euro dollar against Korean Won and the cheap financing in Europe. Financing can be obtained from European banks at less than 1.5% with a supportive leverage ratio of 60-65%. These two yield spreads (hedging premium and yield spread against borrowing cost) will continue to support Korean capital looking into Europe. We have already seen some pipeline deals having several Korean AMCs bidding the same assets together, reflecting their strong investment appetite towards European real estate.

Clearly, the Koreans have arrived. And by all accounts, particularly when European commercial real estate is concerned, it appears that Korean investors will remain invested.

By Leo Chung, Associate Director, Research, Asia Pacific, CBRE

Why UK Real Estate Will Weather the Brexit Storm

The UK’s long-term average share of global real estate investment is about 13%.  Until early 2016, the level of UK investment moved in sync with the global total (Figure 1).

A divergence appeared around Q2 2016 in the run up to the UK’s historic Brexit vote (June 23, 2016). Investment fell sharply, and then fell further after the referendum.

As with British political life, it has been a bit up and down since. Investor confidence has improved a couple of times as expectations of a smooth transition have risen. More recently, as uncertainties have increased, UK investment has been notably lower than the long run average would imply. Year to date, the market has experienced a substantial deterioration in transaction volume.

This makes it interesting to ask the counterfactual question: assuming the long-run synchronization between UK and world real estate investment would have held, what level of investment could the UK have expected if no referendum had occurred?

We estimate that if the UK had maintained its 13% share of the global investment from Q2 2016 to Q2 2019, an additional €90 billion worth of real estate would have been transacted in the last three years. That’s an average of nearly €7 billion each quarter (Figure 2). Given that UK investment was running above trend in 2014 and 2015, this approach probably under-estimates transactions forgone as a result of Brexit. But we choose to side with the cautious approach.

Over the last four years, yield compression has knocked 200 bps off prospective income returns in the Eurozone, from which trend the UK has been immune (Figure 3). This yield stability is new to the UK, as UK prime yields have historically been quite cyclical.

This differential means that prime offices in the UK are trading at substantial discounts or offering favorable investment yields compared to similar assets elsewhere. This positions UK property well for a rebound in activity once the Brexit dust settles, particularly for Euro investors who can benefit from Sterling’s significant depreciation (Figure 4). Savvy investors with a longer-term perspective might see this as a once-in-a-generation opportunity to buy assets in the world’s fifth largest economy.

The lack of yield compression and depreciated Sterling may turn out to be a ‘blessing in disguise’, at least for UK real estate. If the global economy sails into trouble, Britain’s assets are much better priced to weather the storm. Moreover, Brexit uncertainties will pass, and investors may find good bargains if they shop early. Transactions that were lost earlier are likely to come back at a later date.

By Richard Barkham, Global Chief Economist; Neil Blake, Global Head of Forecasting; Wei Luo, Associate Director, CBRE.

A New Budget, a New Capital and New Opportunities

There is a shift occurring in Indonesia.

For several years, the largest economy in South East Asia has performed adequately but not spectacularly. Much of the economic malaise can be blamed on legacy issues of civil conflict, bureaucratic inertia and grappling with tried and true emerging markets issues like overpopulation, degrees of under and over regulation and a vaguely unified national budget and national strategy.

But signs point to change, real change and lasting change.

Enter President Joko Widodo (Jokowi). Recently bestowed a sizable mandate by one of the world’s largest and quickly evolving democracies, Jokowi has made infrastructure development and ambitious new projects like relocating the Indonesian capital city a platform priority for his second term.

This term has now officially begun, with the unveiling of sweeping new budget. The implications for the emerging nation, Indonesia’s wider economy and its real estate will be as sizable as they are ambitious.

On Friday, August 16, Jokowi fired the opening salvo in the blueprint for a new Indonesia, proposing a record-high Rp. 2,528.8 trillion (US$177.56 billion) budget to parliament for 2020.

Paired with the budget announcement, Jokowi outlined his vision for a more sustainable Indonesian economy, setting a reach 2020 GDP growth target of 5.3%, above the consensus of most independent growth projections which stand at between 5.0-5.2%.
So how will he achieve this longer-term feat? Five points or national projects, as Jokowi outlines.

The focus of the budget is on five main areas: infrastructure, human resources, social protection, regional autonomy and global uncertainty. Parliament usually takes until October to approve budget proposals, but we see this as a formally given the weight placed on the pillars by the President.
Curiously and perhaps the most conspicuous node of the broader budget, was a major announcement on the government infrastructure of Indonesia. Preceding the budget announcement, Jokowi formally requested permission from parliament to relocate Indonesia’s capital city from Jakarta to East Kalimantan on Borneo, marking an important milestone in this much-discussed initiative.

Citing the Washington-New York government and commerce split, Jokowi has long held ambitions to divorce the central government from the commercial and densely populated city of Jakarta. In the process, he aims to rightsize the megalopolis to become a more competitive and global commercial centre, complete with an infrastructure overall to aid its stretched roads, utilities and urban apparatus.
The billion question for many Indonesia watchers, is what does the budget and relocation of the capital – slated to begin in 2023 – mean for real estate? A workable hypothesis remains fluid, but we have some indications on what the most immediate implications may be. 
Yes, the budget was thin on real estate-specific measures. The fact that infrastructure remains a key policy objective in Jokowi’s next five-year term will come as a welcome boost for property investors and developers. It is not difficult to see many investors and developers to go long on existing relationships and projects, many of whom have capitalised on opportunities created by the massive investment in airports, roads, ports and railways over the past five years.

The sign of things to come are already present. Many of Indonesia’s leading developers have already taken advantage of the recently completed Mass Rail Transit (MRT) and Light Rail Transit (LRT) systems in Jakarta. They have been actively purchasing land and launching new projects near stations or strengthening the connectivity of existing schemes to the MRT and LRT networks.
More infrastructure is in the pipeline, boosted by the budget no doubt. Major new infrastructure projects due to be completed 2019-2024 include the final sector of the Trans-Java Toll-road; new sections of the Jakarta-Bandung High Speed Railway ; the Jakarta-Bandung High Speed Railway; a new medium speed railway linking Jakarta and Surabaya; Paiban Port in West Java; a new international airport in Yogyakarta; and additional MRT and LRT lines in Jakarta.
Bottom-lining these developments, real estate investors and developers are advised to pay close attention to announcements and progress on these projects. They will play a critical role in improving connectivity and unlocking new areas for development.
The formal proposal to relocate the new capital will also be a gamechanger. It will require the construction of new infrastructure such as roads, railways, offices, and housing. The new center of government will also require supporting infrastructure for the more than 1 million government employees expected to move to the new location over the next decade. This migration in itself will prompt further investors and developers to accelerate planning to capitalise on these opportunities.
Based on comments from senior government officials and Jokowi himself, the new capital will either be in Bukit Soeharto in East Kalimantan or the Triangle Area near Palangkaraya in Central Kalimantan, both on Borneo. A formal announcement is expected later this year.
When the relocation does proceed, CBRE expects that Jakarta will remain the business and financial hub of Indonesia, with the new capital playing host to political and administrative functions.
Any downside for the Jakarta property market will therefore be limited, as while some companies may set up a representative office in the new capital, most occupiers will retain their existing presence in Jakarta, which will continue to play host to the stock exchange, essential financial and business organisations and company headquarters.
The relocation may also create new investment and development opportunities in Jakarta, with senior government officials recently floating the idea of leasing out or even selling government-owned buildings to developers, who would then be obliged to build facilities and infrastructure in the new capital.

Clearly, this time around, this is much to consider in Indonesia’s new budget and with a new capital, a pledge for continual infrastructure investment and redevelopment of the major urban center in the country, longer-term real estate implications.

By Aldo Massali, Country Manager, Global Workplace Solutions, Indonesia & Jonathan Hills, Editor-in-Chief, Research, Asia Pacific, CBRE.

The Census and Multifamily

Census statistics on new multifamily product characteristics provide quantitative support for well known trends and insights into less discussed trends.

The statistics paint a picture of several key aspects of multifamily’s evolution over the past two decades.

The first major characteristic is that development of rental product —vs. for-sale— has become far more dominant in recent years. In 2018, rental completions totaled 318,000 units or 92.2% of all multifamily (345,000 units). Similarly, in the 2010-2018 period, rental product represented 92.5% of all multifamily completions, compared to 73.8% in the 1999-2009 period.

It is notable that over the last three years, there has been a modest rise of new condo construction, and we expect that trend to continue.

Mid-Rise/High-Rise Still Dominates

Garden-style development appears to be on the rise in 2019. Yet that trend was not apparent in 2018 Census data (using the one-to-three-floors category as a surrogate for garden). Last year, garden represented a moderate 37.7% (120,000 units) of all rental completions, down from 2017. In the 1999-2009 period, 80.2% of all rental completions were garden. In the 2010-2018 period, garden represented 51.6%.

While mid-rise and high-rise develop- ment has dominated over the past decade, Census data clearly shows that garden-style development has played a significant role over the past decade, a somewhat overlooked trend.

Unit Sizes Increase in South & Midwest

Unit sizes are growing nationally and in the Midwest and South (even though this seems at odds with increased percentages of efficiencies and one-bedroom units). The 2018 data reveals lower percentages of smaller units and higher percentages of larger units.

At least in the Midwest and South, developers are building larger units likely in response to changing market demand (due to older residents and longer tenure in multifamily housing).

The share of smaller units has risen in the Northeast and West. High housing costs in both regions and the higher percentage of mid-rise/high-rise development in the Northeast (84.4% in 2018) partly explain the regional differences.

One-Bedroom Units’ Share Rises to 45%

One-bedroom units’ market share has been inching up steadily this decade, reaching 45% in 2018. Efficiencies has also been rising as a percentage of all units delivered. Their rising market shares are a response to higher development costs, higher rents and higher density product.

The increase in one-bedroom and efficiency deliveries is also a response to household size demographics. In 2018, one-person households represented over one-quarter (28%) of all U.S. households regardless of housing choice. Two-person households have also been rising steadily and represented 34.5%.

Two-bedroom units’ market share has been edging down over the past decade. The market share of three-bedroom units has declined even more, falling from the 1999-2009 average of 16.4% to only 8.5% in 2018.

Development has never been oriented to families, but the declining market share of two- and three-bedroom units makes it harder for families to find acceptable multifamily housing.

The data also suggests that, despite an interest in attracting empty nesters, the industry is not widely building product for these new potential renters.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Active Adult Housing is Hot – But What is It?

Active adult is one of the hottest specialty housing products today.

Consumer and investor demand are both rising rapidly. Over 40% of baby boomers are 65+ years old; the oldest turns 73 in 2019.

Older boomers are in active adult’s entry target ages—late 60s to mid 70s. Active adult is often marketed to younger seniors, but the average age of active adult residents is about 74 years.

Most seniors in the target age range will remain in their current homes (age in place). Given the large size of the baby boom (74.5 million), if even only a small percentage of the cohort chooses some form of seniors housing, that will create significant increases in demand for lifestyle seniors housing including active adult.

Investor Interest in Active Adult Rises

Increased investor interest is evident in CBRE’s Seniors Housing & Care Investor Surveys. The latest survey revealed that 22% of respondents—all from the traditional seniors housing industry—believe that active adult offers the best investment opportunity among the different types of traditional seniors housing products and active adult. The response is up sharply from 7.7% only four years ago.

In addition, traditional multifamily investors (and developers) see active adult as an extension of multifamily and a product type with significant investment and yield opportunity.

Housing for Younger Seniors

Active adult is one of many kinds of housing designed for younger seniors or housing where seniors are the predominant residents. Active adult can be considered a subset of a broad category of “lifestyle” seniors housing (meaning no healthcare services are provided).

Independent living is also considered “lifestyle,” but is a separate category of housing primarily because it is considered a traditional seniors housing product and because it provides communal dining as part of the fees to live in the community.

For both industry and consumers, the terminology is confusing and often not consistent. There is a blending of concepts at different communities. The confusion is not surprising given the long list of common characteristics as outlined in Figure 4. Figure 3 provides some of the different prevailing types of seniors lifestyle housing and different terms used in the industry. These are not hard and fast definitions, and both terminology and product offerings are evolving.

What is Active Adult?

Understanding active adult starts with positioning it in the housing spectrum (Figure 1), and distinguishing it from other similar housing product (Figure 3), a much more difficult task.

Active adult is blurring the line between conventional multifamily and independent living. It is not considered either, nor is it part of the traditional seniors housing spectrum. Prospective active adult residents often comparison shop conventional multifamily or independent living communities. Moreover, active adult is attracting investor and developer interest from both traditional seniors housing and conventional multifamily companies (and the broader real estate investment world).

The principal differences between active adult and conventional multifamily is the greater attention to community space and to activities. While some multifamily communities do have organized activities, they play a minimal role. In design, active adult and multifamily are quite similar, except for more square footage given to community space. However, many active adult communities are designed for possible evolution to independent living.

Active adult management also arranges for many resident services, more than conventional multifamily. Active adult rents are usually at a premium to comparable multifamily communities due to higher operating expenses (from more programming). Active adult lease-ups are usually much slower than conventional multifamily, though retention is reportedly higher. Prospective active adult residents visit a property several times before leasing, and the leasing decision process is further slowed if a home sale is involved.

Developers and operators of active adult communities are trying to create a new product appealing to baby boomers (“not my parents’ retirement home”), a product that emphasizes an active lifestyle and simpler way of living. Therefore one of the principal differences between active adult and independent living is the emphasis on the active living programming and recreational facilities (e.g., aerobics classes). This focus has much less emphasis in independent living in part due to independent living residents being older— the average age is the mid-80s and rising.

The other principal difference between active adult and independent living is that the latter offers full meal service and the former does not (hence, independent living comes at a much higher price point). Additionally, independent living communities offer more services than active adult. Often with active adult, these services are contracted out or “unbundled.”

One of the challenges of active adult communities is aging residents. As residents age, programming and services may need to change or the residents may need to change—both possibly problematic. Many active adult properties are being designed so they could be converted to independent living communities in the future. The key element is having flex space that could be converted to dining and a commercial kitchen. Individual unit designs also need to include features which make them adaptable for older seniors.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

This is the first of a series of blogs on the active adult sector. The series will define the product, provide perspectives on its recent and future growth, explain the demographics behind the demand potential, examine market performance in the sector, identify leading companies active in the space, and much more.

Capital Accepting Lower Returns for Multifamily’s Other Benefits

Q2’s one-year unlevered return for institutionally-owned multifamily assets was a moderate 5.78%, according to the NCREIF Property Index (NPI), down slightly from Q1’s 5.90%.

The quarterly return of 1.42% was on par with the prior two quarters but under most previous quarters in recent years. Over the post-recession period, the appreciation return has fallen considerable, but income returns have been relatively stable.

Q2’s mediocre return stands somewhat at odds with relatively healthy property fundamentals and sustained peak investment levels. The institutional bias of the NCREIF database and the current underperformance of higher-quality assets overall partly explains this. The seeming contradiction also provides further evidence that capital is willing to accept lower returns for the other investment benefits of multifamily.

Garden Achieves One-Year Return of 8.25%

Garden assets had higher returns than high-rise assets, although the differential between the two categories narrowed. Garden’s one-year return was 8.25%, nearly double the 4.61% for high-rise assets.

The return for garden assets was down from the prior quarter (8.60%) and prior year (9.60%). High-rise returns have held virtually stable over the past year.

In Q2, the main variation between the two subtypes was appreciation: garden was 3.25% vs. high-rise’s 0.60%. Income returns were closer at 4.87% and 3.99%, respectively.

Phoenix Rises to Top Position

Among 27 major metros tracked, Phoenix, Tampa and the Inland Empire had the best one-year total returns. These are all markets that recovered later from the last recession, have somewhat constrained construction pipelines and are experiencing very healthy demand. Chicago (2.17%), New York (2.80%) and Portland (3.09%) had the weakest returns.

Appreciation returns had the largest variation and ranged from 9.15% for Phoenix to -1.86% for Chicago. The income-return range was narrower— from Orlando’s 5.63% to New York’s 3.57%.

The Mountain division had the best one-year return for both garden and high-rise assets. The Pacific and Southeast (largely Georgia, Florida & Tennessee) had the next best returns of NPI’s eight divisions.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.