In 2016, alternative assets continued to remain in the spotlight, attracting increased investor attention and delivering outsized returns compared to core property types.
As we step into 2017, we reached out to experts in the seniors housing, student housing, medical office buildings (MOB), single-family rentals (SFR) and data center sectors for preliminary outlook for the year.
New medical office building (MOB) construction was prominent in 2016, according to Krone Weidler, of brokerage firm Marcus & Millichap. New MOB office deliveries in 2017 (based on preliminary construction data) are expected to meet or exceed totals from 2016, says Hilda Martin, principal at medical real estate data firm RevistaMed.
At the same time, investors should expect cap rates in the sector to increase this year as well, Weidler notes, as a result of the Fed raising its benchmark interest rates. That shouldn’t have too much of a negative impact on sales activity, however, notes Martin.
“In terms of sales activity in the medical office sector, we believe pricing will remain strong in 2017, with activity consistent with recent quarters—strong, but off peak from 2015 highs. We expect a continued high interest from private equity groups,” she says.
In 2017, some SFR investors will focus on optimizing the operations and management of their properties, says Anthony Cazazian, chief investment officer of SFR property management firm Renters Warehouse. Others will look into “how to invest strategically in multiple markets and who is providing financing for these investments across state lines,” he says.
Investors in the sector will turn to acquiring “stable cash-flow assets” rather than buying distressed homes and looking for home price appreciation, which he says is “less prevalent these days.”
More SFR companies are also expected to go public in 2017, Anthony notes, “and in 2017 we will see a larger portfolio of trades occur—100, 500, 1000 homes.” Renters Warehouse predicts asset prices will increase, but at a slower rate than before.
Meanwhile, as interest rates rise, investors have looked to lock in 30-year fixed financing for their rental properties, a trend that is expected to continue, according to Eric Workman, director of long-term financing at real estate investment firm Renovo Financial. “Investors want to lock in their cost of financing because there is some uncertainty about what impact rates will have. As rates go up this year, locking in financing for an extended tern will be more applicable for their business.”
Data center experts are predicting 2017 will be a strong year for this asset type.
Demand for cloud storage is increasing, according to Ben Kaplan, vice president of data center development at Turner Construction, a construction management firm. He expects the market to remain robust for the foreseeable future, and certainly for the next two to three years. “There is a good flow of opportunity and potential activity for us” over that period, Kaplan says.
Many of Turner’s clients are looking for their data centers to be carbon-neutral. Co-location is another trend gaining steam for data centers in 2017, Kaplan notes. “Co-location is a trend that didn’t exist 10 years ago and is now increasing. We expect that development trend to continue. Colocation is a developer-driven model, where there are often multiple tenants within a single data center.”
Economic support from local and state governments will continue to be something that data center developers look for in 2017, for instance in the form of a sales tax abatement, Kaplan adds.
The largest and most vibrant markets for data centers are Northern Virginia, Silicon Valley, Chicago, Dallas-Fort Worth, New York/New Jersey, Atlanta and Seattle, according to Todd Smith, chief technology officer of with the data center solutions division of real estate services firm Transwestern.
“The landscape continues to trend into a buyer’s market with prices for space and supporting infrastructure having fallen during the past few years due to increased competition and maturing abilities of the data center providers to bring high-quality facilities online at lower costs,” Smith adds. “Pricing is now relatively stable for facility services with many buyers now considering various forms of virtual data center outsourcing with cloud service platforms. Cloud service providers themselves, notably Amazon and Microsoft, have become coveted customers and partners to the leading data center facility providers.”
The continuum of care trend will remain a focus for seniors housing operators and investors, according to Matt Booma, executive vice president with Chicago-based developer CA Senior Living.
“Having a property that offers independent living, assisted living and memory care—there will be continued growth in the market in 2017 for maintaining that strategy,” Booma says. More than 10,000 people turn 65 every day, with the growing demographic offering opportunity in the asset class for the foreseeable future, he adds.
Student housing developers delivered 47,716 beds in 2016, according to data firm Axiometrics, which track the asset type. New supply in 2017 should total 47,356 beds, the firm’s researchers estimate.
But while construction will mostly keep pace with recent years, amenities for student housing should “come back down to earth,” as land availability in college towns wanes, according to JJ Smith, president of CA Student Living, a Chicago, Ill.-based student housing owner and developer. His firm expects to deliver 3,500 to 4,500 new beds annually through 2020.