Seven Property Types to Invest in 2016
Halfway through 2016, seven property types could prove to be the most profitable this year.
1. Seniors Housing
Senior housing increases as an investment opportunity with the U.S. aging demographics. Andy McCulloch, managing director and head of real estate analytics at Green Street Advisors suggests, “Despite an alluring long-term growth story built on demographics and an aging population, the sector will be tested over the next couple of years as outsized level of new supply gets delivered into the market.” Also, though senior housing is expecting a upward demand, the rate of rent increases might not be as fast as that of multifamily, as noted by Barbara Byrne Denham, an economist at Reis.
2. Student Housing
Student housing has attracted attention from developers and investors in recent years. A report from Situs RERC indicates that the pre-tax yield for student housing properties was 7.6 percent in Q1 2016. “Student housing operations are generally in line with the long-term trend, and the sector’s defensive attributes have not gone unnoticed by investors (student housing is the best performing sector year-to-date in the REIT space),” says McCulloch. However, a “demographic lull in college-aged students and further acceptance of on-line education pose a threat to lower-tier universities,” he adds. In addition, although Denham calls student housing a “good market,” the high cost of amenities to satisfy occupiers can put a dent in investor returns.
3. Suburban Office
The office sector is predicted to perform well in 2016. With national office vacancy rate has dropped 20 basis points in both Q4 2015 and Q1 2016, Reis notes that 52 of 82 markets the firm surveyed reported occupancy improvements and 75 out of 82 showed increases in effective rent.
The long-overlooked suburban office property is attracting increased investor interest. It is one of the few property types demonstrating recovering growth, according to Green Street Advisors. Suburban office properties saw no rent growth for years, while CBD office buildings experienced significant price increases. But that trend is now reversing.
4. Flex Big-Box Warehouse
Flex big-box warehouse space is one of the healthiest industrial sub-sectors, which has been getting a lift from e-commerce tenants. “Against a backdrop of healthy demand boosted by e-commerce, market rent growth has been stronger than expected. While new supply and obsolescence are always concerns for industrial, the sector’s future growth prospects look better than past performance would suggest,” McCulloch says. Investment sales volume in the warehouse space in April came in at $2.5 billion, according to Jim Costello, senior vice president at research firm Real Capital Analytics (RCA). Reis reported that the average asking rent for flex space was $9.22 per sq. ft. in first quarter 2016, and asking rents grew 1.7 percent year-over-year.
The price appreciation within the self-storage industry has risen 16 percent over the past year, according to data from Green Street Advisors. “Storage continues to become more accepted as an institutional asset class, and operating fundamentals have been phenomenal. Higher cap rates, solid NOI growth and low cap-ex make self-storage a great business,” according to McCulloch.
6. Neighborhood Community Centers
Situs RERC believes that the neighborhood community center is one of the best investments right now. The firm rated neighborhood community centers as 6.4 out of 10.0. “Strip center tenants are generally healthier than mall tenants today—especially when putting department stores into the mix. While retailer bankruptcies are a continued nuisance in the strip sector, the lack of ground-up development points toward a continued improvement in operating fundamentals,” McCulloch notes.
7. Street Retail
The street retail investment market remains resilient. Analysts are reporting a recent uptick in demand for street retail space. “In the 2006-2007 period, the urban/storefront market saw average quarterly deal volume of only $1.1 billion. In 2014 and 2015 by contrast, the average was $3.7 billion,” says Costello. “Average cap rates were down to 4.9 percent in first quarter 2016. By contrast, retail cap rates overall average 6.6 percent.” McCulloch also notes that street retail has been a very hot property type over the past few years. However, “The rent growth required to make some of these recent deals pencil might be unrealistic,” he notes.
Source: “Seven Property Types to Invest in This Year,” National Real Estate Investor (May 26, 2016)
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