Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/443516
24 January | February | 2015 Commercial Investment Real Estate two years (new supply of 29,531 units/annual absorption of 13,644 units = 2.2 years). T e delivery timeline will be staggered and will not be evenly dis- tributed across the country. Some properties will reach stabiliza- tion quickly. Projects in the pipeline may be accelerated or delayed depending upon the availability and timing of f nancing, 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. T e increase was due to rising labor costs and costs of manufactured and engineered construction components; raw mate- rial prices remained f at. 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 per- cent 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. T is will be the high- est 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. T is means the average occupancy level for majority independent liv- ing properties will be a full 200 bps higher than major- ity assisted living. T e 2016 and 2017 peri- ods 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 obser- vations and comments from the October 2014 NIC National Conference as well as ongoing discus- sions with operators and capital providers suggest that many are contemplat- ing 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 of en 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 Projected Supply, Demand, and Occupancy Rates for Independent Living Source: NIC MAP ® Data Service 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 –500 –1,000 93.0% 92.0% 91.0% 90.0% 89.0% 88.0% 87.0% 86.0% 85.0% 84.0% 83.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inventory growth (L) Absorption (L) Occupancy (R) Seniors housing 20.37 NCREIF Property Index 11.26 NAREIT Equity REIT Index 13.18 Barclay's Capital Govt Bond 2.28 S&P; 500 Index 19.74 T-bills (90 days) 0.04 Source: NCREIF One-Year Returns (%), as of September 2014