Capital Markets Multi-Housing

Transcription

1 Capital Markets Multi-Housing Annual Market Report A Special Report from CBRE Global Research & Consulting and CBRE Capital Markets

2 Annual Market Report To Our Valued Clients: saw the continuation of sustained and broad-based NOI growth in the multi-housing markets nationally. This revenue growth coupled with low interest rates and plentiful investment capital fueled the % growth in sales of apartments to $ billion at year end. Cap rates for high-quality core assets were % or below in markets and % or below in an additional markets. Current valuations are above previous / peak pricing in eight markets, including San Jose/San Francisco, Manhattan and Denver. Prices continue to lag significantly in Florida and the Southeast, but should improve as those markets continue to recover. Institutional owners have shown a willingness to accept lower unlevered returns for core multi-housing in primary markets of approximately.% given the perceived stability of the multi-housing product. Private investors, given positive leverage, are seeing current returns of high single digits and levered returns in the low- to mid-teens. Developers and buyers are willing to more seriously consider presales given the dearth of product in the market. Meanwhile, owners are seriously considering bringing portfolios to market due to perceived portfolio premiums. At this point in the cycle, many of our clients believe that Class B properties will have higher rent growth over the next months. As a result, there is significant interest in value-add opportunities among private equity investors. Development activity is approaching pre-recession levels, with starts in the range of, units per year. Development equity is readily available but not easily accessible, as institutional investors maintain their laser-like focus on core urban infill projects. Occupancies remain strong at 9%; however, given new supply and the significant annual rent increases over the past two years of %-%, it is anticipated that rent growth will moderate to %-% on average in. The debt market has become quite competitive in the past year, with strong activity among banks, CMBS, FHA and insurance companies. Insurance companies have lowered their debt floors to the low s for lower-levered, high-quality deals. Fannie Mae and Freddie Mac continue to be the largest providers of permanent debt for multi-housing properties, having closed more than $ billion in loans in. However, concerns remain as to when and how Congress will ultimately resolve the Fannie Mae/Freddie Mac conservatorship. The resurgence of the U.S. multi-housing market has been extraordinary during the past three years, particularly when compared to the performance of other commercial real estate property types. Strong fundamentals and demographics, expected continued low interest rates, and a manageable development pipeline suggest that the U.S. multi-housing sector will likely remain a solid performer for the foreseeable future. We hope you have an opportunity to spend a few minutes with our Multi-Housing Annual Market Report, and that you find it of value. The information presented herein is the result of the efforts of our investment sales and debt and equity finance professionals, along with CBRE Global Research & Consulting. We look forward to an active and strive to put the client first, always. Respectfully, Peter Donovan Senior Managing Director CBRE Capital Markets Multi-Housing Group Brian McAuliffe Senior Managing Director CBRE Capital Markets Multi-Housing Group Cover photo: Excelsior & Grand, photographed by Alec Johnson of AC Johnson Photography

3 Table of contents National Perspective & Outlook Debt & Equity Finance Market Trends Seniors Housing Outlook Student Housing Outlook Manufactured Housing Outlook 9 Low Income Housing Tax Credit Outlook Canada Market Highlights united Kingdom Market Highlights Case Studies Regional Highlights Current Market Cap Rates CBRE Capital Markets Milestones About CBRE s Multi-Housing Group CBRE Global Advantage CBRE Econometric Advisors

4 Overview National Perspective & Outlook With the U.S. multi-housing expansion now is in its second year, new supply as measured by starts has returned to normal levels. Demand continues to grow at a strong pace, but rent and revenue growth are decelerating across markets, and we expect a further slowdown in the second half of. Despite this, the national multihousing market will remain healthy with vacancy staying near its long-term average and rent growth slightly above consumer price inflation. From this perspective, the sector compares favorably to other property types and continues to attract strong investor interest. Meeting future expectations, however, will require a balancing act between future job growth and new supply. Much depends on whether new supply will remain disciplined over the forecast horizon real (inflation-adjusted) rent levels suggest that completions should peak in, yet the number of projects in planning indicate some potential for further increases in. At the same time, if lending for home purchases remains constrained, there is also potential for stronger apartment demand and further drops in vacancy over the next year or two. A tangible increase in completions expected in the near term will temper rent growth and slow the pace of declines in vacancy and in many markets contribute to rising vacancy rates. As the job market recovers and construction begins to moderate in and beyond, vacancy rates should stabilize and support steady rent growth. At the same time, rent and revenue growth are bound to slow down from the pace of -. This is not true for all areas, however, and it is this variation in fundamentals that may present opportunities to investors especially if one takes into account pricing variation across markets. Rapid growth among households under the age of and over the age of remains a favorable tail-wind for multi-housing demand. Another long-term trend that favors the sector is the rise in single-person households. This group is expected to expand by to million households during this decade, and there is potential for most of the demand to be absorbed by rental apartments and townhouses/condominiums. For investors and developers, a more thorough understanding of this group s income, age profile and lifestyle choices will be key in their ability to absorb some of the demand. Single-family homes captured most of the growth in rental demand over the past few years. In the fourth quarter of, multi-housing demand expanded by, units, or.%, on a year-over-year basis, slightly below the pace of growth seen through much of. The largest contributors to national demand growth were New York, Houston, Los Angeles, Dallas, Seattle, Atlanta, Washington, DC, Austin, Phoenix and Miami together, these markets accounted for more than half of the country s total net absorption. The national vacancy rate declined by basis points (bps) to % in and is now bps below the historical average (as of first quarter ). The strongest improvements in vacancy (declines of more than bps between fourth quarter and fourth quarter ) were seen in Jacksonville, Charlotte, Atlanta and Seattle. Smaller year-over-year vacancy increases were reported in a number of larger markets, including Boston, Washington, DC, Chicago, San Francisco, Philadelphia and Detroit. Markets with the lowest vacancy rates (at or below.% in ) include Pittsburgh, Minneapolis, Miami and Boston. Conversely, markets with the highest vacancy rates (at or above % averaged over the past four quarters) include Houston, Phoenix, Atlanta, Tucson, Memphis, Las Vegas and Jacksonville. Apartment demand continues to be driven by two factors: job growth and expansion in broad rental demand. As the chart to the right shows, apartment demand has grown in tandem with jobs and Rapid growth among households under the age of and over the age of remains a favorable tail-wind for multi-housing demand. Capital Markets Multi-Housing Annual Market Report

5 this growth was close to the historical norm. Improvements in the economy and broader housing market should help augment demand. Growth in occupied stock is averaging.% per year over the next five years slightly below the.%-per-year pace averaged over the last three years, as well as the last years. The nation s labor market continued to improve in. Markets leading in relative job growth (over.% growth from year-end ) included Austin, San Francisco, Houston, San Jose, Oklahoma City, San Antonio, Phoenix, Cincinnati and Seattle. Slightly negative year-over-year changes in employment were reported in Kansas City, Miami, Nashville, Memphis and Albuquerque. When looking at job expansion across markets, one must review both the growth relative to the nation and the growth relative to the recent pace. In the first case, markets to lead the nation in job recovery include Austin, Phoenix, Dallas, Atlanta, Orange County, Seattle and Houston. These cities benefited from strong demographics and/ or favorable industry mixes, including technology, energy and business services. Of note, though, is that job growth is not speeding up in all metro areas, and a few such as Houston, Denver and San Francisco will experience notably slower growth over the next two years as compared to the previous two. But, as a rule, most major markets will add more jobs at this stage of their recovery. Housing will be one of the key factors driving this improvement in the labor market, making home prices another indicator to watch closely. This, along with changes in home lending, will impact how quickly owner demand will come back. The rebound in prices is an important new trend for the economy in. First, it should jump-start single-family development, which would lead to more construction jobs. Second, it will help to bring foreclosure levels down. In this respect, we see as a transition year for the nation s housing market. While the recovery in prices has started, it is still very much driven by investor purchases rather than household formation and demand for primary-owner occupancy. Home delinquencies came down in along with the unemployment rates and are likely to improve even through the remainder of. Still, the delinquencies remain elevated by historical standards and continue to cause softening in owner demand. This has potential to trigger further drops in the nation s homeownership rate, although perhaps not as significant as we ve seen over the past few years. Apartment Demand closely follows job Growth Year-over-year % change Total employment Renter households Apartment demand (occupied stock) Quarterly Sales Volume, $Bil 9 Garden-Style Mid/High-Rise Source: Real Capital Analytics

6 Overview Another key factor impacting apartment demand growth, albeit indirectly, is change in housing tenure, or the share of households that own versus rent. U.S. broad rental demand continues to expand rapidly as more existing households shift from owning to renting, and as more newly formed households decide to rent, rather than buy, homes. According to the Housing Vacancy Survey conducted by the Bureau of the Census, U.S. housing demand grew by 9, households between fourth quarter and fourth quarter, including, in the South,, in the Midwest,, in the West and, in the Northeast. During the same period, the national homeownership rate witnessed a -bps drop, from % to.%: Homeownership rates declined from.% to % in the South,.% to 9.% in the West and % to 9.% in the Midwest, and increased from.% to.9% in the Northeast. Total household growth and the net decline in the homeownership rate produced an increase of,, renter households nationally, including, in the South,, in the West and, in the Midwest. Renter households decreased by, in the Northeast. On the supply side, U.S. multi-housing (five-plus units) permits increased to an annualized pace of 9, in fourth quarter from, units in the previous quarter. Meanwhile, starts increased to 9, from,, and completions edged down to, from, units. While completions remain below their 99- average of,, the pace of permits and, particularly, starts does indicate that new construction activity has returned to the historical norm (the -year averages are, for permits and, for starts). Given the historical relationship between starts and completions, deliveries are on track to surpass, units in, up from the annual pace of about, in and, in. The chart below provides historical context for supply trends across markets and shows where multi-housing permits were in, relative to 99- averages. Nationally, permits were at their -year average at year-end ; however, in Raleigh, Austin and San Francisco they are more than twice those markets historical averages, with Minneapolis, Houston, Washington, DC and Dallas not far behind. As a result, such areas do face higher supply-side pressures in the near term, especially if job recovery turns out to be slower than expected. Properties Total Sold Price, $,,,, $,,,9,99 $,,,,9 $,,,, $9,,9,,9 $9,,,, $,9,,, $,,, 9, $,,,, $,,,, $,,,, $,,, Source: Real Capital Analytics Rate of mulit-housing (+ units) permits issued in 99 - average Raleigh Austin San Francisco Minneapolis Houston Washington, DC Dallas Boston Philadelphia New York Seattle Average Los Angeles Phoenix Atlanta Miami Chicago Detroit Sources: Bureau of the Census, CBRE Econometric Advisors Capital Markets Multi-Housing Annual Market Report

7 The outlook for new supply beyond is closely tied to where rent levels will be in real (inflationadjusted) terms. In terms of severity of declines in real rents and new supply, the most recent downturn is somewhat analogous to that of the early 99s. However, the recovery has taken less time in the current cycle. New supply in particular has fallen much more than it did in the early 99s and more than one would expect, considering where real rents have bottomed out. This was not due to real estate fundamentals but rather the credit freeze during the Great Recession including construction lending. As rents recovered in nominal terms in and returned to their historical average in real terms in, multi-housing starts picked up and, by year-end, had recovered to the 99- average. With rents expected to grow at bps above consumer inflation, new supply should remain relatively stable or rise very gradually beyond. A sudden surge in multi-housing construction far above those sustainable levels would affect occupancy and/or rents, resulting in lower-than-expected revenue growth. Potential for such a surge does exist as there is currently more than four years of new supply in various stages of planning. As such, it is important to continue closely monitoring supply trends. The national same-store effective rent index increased at an annualized rate of.% in fourth quarter, down from the.% growth pace recorded for the previous quarter. Compared to year-end, the strongest (over %) growth in the same-store effective rent index was reported in San Francisco, Denver, Charlotte, Boston, New York, Austin and Nashville. Markets with the slowest (less than % year-over-year) growth included Atlanta, Riverside, Phoenix, Sacramento, Albuquerque and Las Vegas. Rent growth is slowing in most areas, including all six primary markets (Boston, Chicago, Los Angeles, New York, San Francisco and Washington, DC). Among the larger metros, Houston and Seattle are the only markets showing continued momentum in rent growth. A number of markets, including Phoenix, Las Vegas, Atlanta and Sacramento, should continue to see stronger rent growth in as a result of more robust demand and occupancy. Denver, Austin, San Francisco, Houston, San Antonio, Seattle and Portland are expected to experience the strongest growth. These are examples of markets where total employment has already recovered, those with strong technology sectors that will help drive their employment recoveries, as well as those in the early phases of their cyclical recovery. The demographics of rental demand including rapid growth in households under the age of as well as age and over will keep apartment fundamentals strong beyond the immediate horizon. Assuming a sustained recovery in employment and home prices, growth in apartment demand should be sufficient to keep vacancy rate near its historical average as long as new construction increases gradually. While apartment rent and revenues are expected to grow above consumer inflation and their respective historical averages during the next five years, they will still only be returning to a long-term norm measured by real (inflation-adjusted) rent levels. This is a good reason for new supply to remain in check.

8 Overview Debt & Equity Finance Market Trends Commercial real estate lending markets finished on a high note, with a flurry of deals closing during the fourth quarter. According to CBRE s analysis of loan closings, total commercial lending volume increased by % in s fourth quarter over year-earlier levels. In addition to strong growth in multifamily lending from the agencies (up % from levels), banks and CMBS lenders contributed disproportionately to the overall gains. This offset a slight retrenchment in lending from the life companies, which were a linchpin of the commercial lending recovery in and. Buoyed by strong demand for new acquisition credit, the refinance market appeared to improve, aided by low interest rates, gradually rising property net operating income, and an increase in the availability of mezzanine debt. Commercial real estate fundamentals improved during the latter part of, but the pace of recovery was mixed across the major property types. However, the multi-housing sector s recovery continued to outperform other property types. According to CBRE Econometric Advisors (CBRE-EA), multifamily occupancies rose above their long-term average to reach 9.% nationally during fourth quarter, prompting a.% year-over-year increase in net effective rents. Rental market improvements have broadened geographically, with of the markets tracked by CBRE-EA posting higher occupancies during the past year. The economy showed steady gains in private employment and encouraging signs that the housing market finally turned a corner during. Average monthly job growth was recorded at, in, a slight improvement upon s average. Favorable job growth figures were also reported during first four months of. With the economy recovering close to seven out of every ten of the jobs lost during the recession, housing markets have benefitted from improving demand and an easing According to CBRE Capital Markets survey of lending volume, the agencies accounted for more than % of total volume during the fourth quarter of, up from % one year earlier. Capital Markets Multi-Housing Annual Market Report

9 cbre multi-housing lending momentum index Updated as of Q Lending Momentum Index, SA, = // // // 9// // // // // // 9// // // // // // 9// // // // // // 9// // // // // // 9// // //9 //9 //9 //9 9//9 //9 // // // // 9// // // // // // 9// // // // // // 9// // Momentum Index Sources: CBRE Capital Markets of foreclosure activity. The S&P-Case-Shiller national home price index increased by.% during, while existing home sales were more than % higher than year-earlier levels, according to the National Association of Realtors. Against the backdrop of an improving housing and employment picture, concerns remain that several factors could dampen the recovery in. These factors include slower growth in consumer spending due to recent payroll tax increases, the potential negative impact of fiscal restraint from Federal sequestration, and reduced export demand from the weakened Euro Zone economies. Despite these risks, we remain cautiously optimistic that the commercial real estate finance markets will continue to improve in. The Federal Reserve s accommodative policy stance is likely to remain in place for some time, providing borrowers ample opportunity to lock in historically low interest rates. Over the course of, overall liquidity is likely to continue to improve, as CMBS lenders and banks provide higher levels of lending capacity. With fewer constraints on property-type and market selection, we believe these lenders will help improve liquidity to the secondary markets, where many borrowers faced fairly limited borrowing options over the past few years. Furthermore, we believe that the volume of outstanding distressed loans will continue to shrink in, reflecting fewer new additions to the distressed pipeline, as well as an increase in dispositions by banks and special servicers. Lending Momentum Improves in The CBRE Multi-Housing Lending Momentum Index showed additional gains in multi-housing loan origination volume during the second half of. By December, the Index had reached a value of. The Index compares origination volume to a base level of, which reflects average lending activity during the year. The Index is also adjusted for seasonal variation. After the period of sharp retrenchment during the recession, the Index showed a somewhat volatile period of increases in lending activity through January, before a decline ensued during the first half of. Since June, the Index has once again moved higher. To interpret the Index, one should place it in historical context. The Index stood at a value of in May of versus a high of in September. The way to interpret this change is in absolutes: There was a % decline in lending volume over this -month period. Having reached this bottom, lending activity has recovered and expanded over this period, reaching in January. During the first half of, multifamily lending settled into a lower level of activity, though it was still well above recent historical averages. In June, the Index reached a value of. Activity picked up during the second half of the year, with the Index matching its January peak in August, before reaching a new peak of 9 in November. The Index finished the year at, almost % higher than its June level. Compared to activity one year prior, December s Index was up %.

10 Overview The Lending Landscape The agencies continued to dominate multifamily lending activity during. According to CBRE Capital Markets survey of lending volume, the agencies accounted for more than % of total volume during the fourth quarter of, up from % one year earlier. During this period, life companies yielded market share to banks, which witnessed improved overall lending volumes. Bank lending increased during fourth quarter, with more than $ million in multifamily loans closing during the three-month period. This was more than double the origination volume registered for the same quarter in. The improvement reflects the fact that banks have aggressively repaired their balance sheets through working out troubled real estate and development loans. As a result, banks are much better capitalized and appear well positioned to extend credit on a selective basis. Life insurance companies share of multifamily mortgage originations were almost the mirror image of banks during this period. Life companies total commercial mortgage origination volume was slightly in excess of $ million during the fourth quarter, or.% of total activity. In contrast, during the fourth quarter of, life companies originated $ billion, accounting for close to.% of total originations. CMBS issuers trailed other key multifamily lenders over the two comparison periods. Commercial LTV s Creep Upward, Multifamily LTV s Dip In the final quarter of, average loan-to-value ratios (LTVs) for commercial and multifamily loans converged in a similar fashion to what we witnessed a year earlier. Average LTVs for commercial loans reached.9% during the fourth quarter of, up from.% in the third quarter. The fourth quarter figure was slightly below the average set one year earlier, which represented the highest average LTV since the end of the recession. While average commercial LTVs have been somewhat volatile from quarter to quarter, they appear to be stabilizing between % and %. This represents an improvement over the % low recorded during the recession in 9, but is still substantially short of the % peak registered during the credit boom in. It appears that lenders may be reluctant to grant much higher average LTVs until commercial real estate fundamentals demonstrate more sustained improvement. After holding above 9% for each of the first three quarters of, average multifamily LTVs dipped to.% during the fourth quarter. This represented the lowest average multifamily LTV since mid-. Multifamily LTVs have remained stable in recent quarters, reflecting the influence of the agencies on overall loan origination and underwriting parameters. Since 9, average multifamily LTVs have remained in the relatively narrow range of % to %. In recent quarters, the overall volume of loans has been fairly evenly split between acquisitions and refinancings. Banks have aggressively repaired their balance sheets through working out troubled real estate and development loans. Commercial and Multi-Housing LTVs Converge in Updated as of Q Average LTV % Average Loan-to-Value Ratio Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Commercial Q Q Q Q Q Q 9 Q 9 Q 9 Q 9 Q Multi-family Related Q Q Q Q Q Q Q Q Q Q Q This is the average LTV for deals with fixed rate permanent debt. Source: CBRE Capital Markets Capital Markets Multi-Housing Annual Market Report

11 Capital Market Trends During the last three months of, the Treasury market remained relatively stable, with benchmark -year bonds trading between.% and.%; the high end of this range was recorded in mid- December. Through April, the ten-year treasury hovered in the range between.% and.%. Compared with the market closed at the end of the fourth quarter, the treasury yield curve shifted in from to bps for securities maturing between seven and years. Most analysts do not expect a sharp sell-off in Treasury markets at least over the short term as rates are likely to fluctuate in a relatively narrow range. The case for the continuation of low interest rates reflects a number of factors, including sluggish economic growth in most regions of the globe, especially in the Euro Zone; the effects of fiscal austerity; low inflation expectations; a high degree of risk aversion among global investors; and continued quantitative easing measures by central banks. In September, the Federal Reserve announced a new quantitative easing bond-buying initiative, the so-called QE program, which targets additional Treasury and mortgage-backed securities purchases. The Fed also introduced a major policy change in December by announcing that it will continue to make significant bond purchases to maintain low interest rates until the unemployment rate reaches.%. The Fed has justified its policy stance due to an extended period of modest employment growth, the lack of significant inflation and above-average unemployment. Employers expanded payrolls at an average monthly pace of 9, during the first four months of the year, an improvement upon the, monthly average for. According to the Bureau of Labor Statistics, job creation totaled. million for all of, a slight improvement over s totals. However, unemployment remains a concern, given a high number of long-term unemployed and workers classified as marginally attached to the labor force. In April, unemployment reached.%, down from a rate of.% a year earlier. Meanwhile, the Bureau s report on consumer prices indicated that inflation remains under control. In April, the Consumer Price Index was up.% from yearearlier levels. Excluding food and energy, inflation registered a.% increase. Notwithstanding the Fed s increasingly aggressive attempts to stimulate economic growth, companies and investors keep a keen eye on macroeconomic risk. Although a year-end compromise was reached between the Administration and Congress regarding taxes, spending issues remained unresolved as of mid-april, causing automatic budget cuts under sequestration. It appears that uncertainty surrounding federal spending cutbacks will continue to negatively affect businesses and investors willingness to take risks over an extended period. However, with historically low interest rates, investors have been under pressure to seek higher yields in credit instruments. Spreads on Moody s Baa-rated corporate bonds tightened by close to bps over the course of fourth quarter. More importantly, the CMBS market closed on a high note, capping a year-long rally. Spreads on new-issue -year, AAA-rated CMBS bonds reached an average of bps over the swap curve at the end of, down from close to bps at the end of the third quarter and more than bps at the beginning of the year. The decline in spreads has made CMBS loan pricing increasingly competitive with other sources of commercial real estate lending. 9

12 Overview Key Commercial Real Estate Finance Trends for A year-long rally in spreads made CMBS pricing highly competitive with banks and life companies by the end of. As a result, CMBS issuance jumped by more than % for the year, to reach a total of $ billion. Judging by the first quarter s strong performance, CMBS lending volume could be robust in. Some observers are particularly bullish, with expectations that new issuance will reach the $-$ billion range, far surpassing s level. Clearly, the market appears well-positioned to capture an increased share of commercial and multifamily lending, but questions remain regarding the short- and long-term industry trajectory. In addition to questions around the ability of investment-grade bond buyers to continue to support pricing levels in the market over the near term, some have concerns regarding the available capacity of B-piece buyers to support substantially higher levels of issuance. Furthermore, concerns remain about the final shape of regulatory reform, especially with regard to risk retention requirements and rating-agency governance under the Dodd-Frank financial reform law. Nonetheless, the favorable pricing and performance in CMBS bonds continue to attract an increasing number of fund managers into the sector. Compared with other investments in sectors such as high-yield corporate bonds and mortgage-backed securities, CMBS bonds offer strong relative value. Additional CMBS buyers could mean lower bond spreads, which would translate into lower lending rates for borrowers. Distressed Loan Volume Wanes We expect the volume of outstanding distressed apartment loans to shrink during, continuing a trend that took shape during. According to Real Capital Analytics, the volume of outstanding distressed apartment deals fell by % in, as net additions to distressed property outstanding eased while workouts and resolutions surged. This shift in the market reflects a number of factors that have emerged over the past several months. Large amounts of capital raised for distressed deals have helped support transaction volumes and pricing, inducing banks and special servicers to dispose of distressed assets more rapidly. Furthermore, the increased availability of mezzanine debt has helped increase refinance proceeds, allowing maturing CMBS loans to refinance at some of the highest rates since the beginning of the recovery. Finally, banks have aggressively shrunk their delinquent construction and development loan portfolios, leaving a reduced pipeline of deals to work out in. Agencies Continue to Dominate 9% Who s Lending on Multifamily Properties? % % % % % % % % % Agencies Bank Life Company CMBS Other Q Q Source: CBRE Capital Markets Capital Markets Multi-Housing Annual Market Report

13 According to Real Capital Analytics, approximately $. billion in seniors housing was acquired in, with another $. billion in skilled-nursing. Seniors Housing Outlook The seniors housing sector continued to show strong fundamentals in, in line with the overall economy. This performance followed modest improvements made in, except in the skilled nursing sector, where both occupancy and new development dipped. As in, development of new product remained extremely low and price sensitivity continued to play a major role in occupancy growth. Transactional market activity showed no indication of diminishing demand. Indeed, pricing continued to climb, and the statistical slowdown forecasted last year was the result of a constrained pipeline, rather than weakened demand. Publicly held REITs continued to play a leading role in both pricing and the acquisition of larger portfolios, followed by private equity funds and owner/operators. The seniors housing sector has seen a plethora of new entrants to the marketplace, apparently looking for yield-based acquisitions. It remains to be seen whether these entities will be able to acquire at yields commensurate with the operational risk that will be assumed. Operational fundamentals continue to remain steady with no significant cost reduction and only modest revenue growth. The cuts announced in by the Centers for Medicare and Medicaid Services appear to have curtailed any significant interest in expanding the skilled nursing sector and continue to raise doubts regarding the stabilization of revenues. While values in the nursing sector have normalized, pricing is slightly more conservative than it was in. Improvements in employment and, perhaps even more significant, the single-family housing market suggest the sector will continue to enjoy increasing occupancies and consumer demand, with personal income and liquidity playing a less-influential role in the decision to move into seniors housing. As in years past, the entrance fee communities continue to trail the independent-living, assisted-living/ memory-care and skilled-nursing segments of the sector by virtue of the economic structure and their perceived macroeconomic condition. Operational Trends Continue to Improve Occupancies across the continuum of independent- and assisted-living/memory care facilities continued to improve on a year-over-year basis in, while the skilled-nursing segment witnessed a slight decline. According to the National Investment Center for the Seniors Housing and Care Industry (NIC), independent- and assisted-living/memory-care occupancy has risen consistently for nearly three years, with average occupancy for the two care levels at 9.%. This is more than basis points (bps) higher than the cyclical lows experienced in the first quarter of. Occupancy in the majority of independent-living facilities now averages 9%, while the lion s share of assisted-living/memory-care facilities average.9%. In the skilled-nursing segment, average occupancy had slipped to.% as of year-end, from.% in the fourth quarter of. The modest growth beginning in the second quarter of has continued through year-end, representing an -quarter period of stable or increasing occupancy. While demographics play a crucial role in determining the depth of future markets, current occupancy is a representation of the current market. It appears the current market is enjoying improving fundamentals with little indication of abatement. Regardless of demographic growth, the private-pay seniors housing segment will trend more like the broader economy and market-rate multi-housing product. As employment and the residential real estate market rebound, albeit slowly, the sector should continue to benefit. As with the multi-housing sector in general, the averages offered herein may not be representative of specific metropolitan markets. Certain metro areas may have experienced far better or worse occupancy averages.

14 Overview Year-Over-Year Rental Rates Continue Growth Pattern As occupancy continues to increase year over year, operators have been able to raise rental rates on a per-unit basis. These increases, however, have been quite modest. Discounting continues to occur at point of sale, while programmatic discounting has become less commonplace, given that occupancies are hovering in the 9% range and properties are generally stabilized. As reported by NIC, fourth quarter rental rates for independent-living facilities averaged approximately $,, compared to assisted-living communities (including memory-care properties), which averaged $,, and nursing-care facilities, which averaged $,. In the fourth quarter of, average rental rates increased to.% for independent-living,.% for assistedliving, and.% for nursing-care communities. These averages include base rents and monthly care fees. They do not include ancillary, or à-lacarte, care fees, move-in fees or community fees, and do not factor in the negative impact of concessions. While once again modest, the yearover-year increases are significant, proving that industry fundamentals are showing growth and improvement. potential capital size of the senior housing marketplace - for private pay demand, $ in billions $ $ $ $ $ $ $ $ $ Independent Living Assisted Living Skilled Nursing projected population growth between - will fuel demand for senior housing % Construction Activity Trails Absorption Seniors housing construction activity, while reportedly on the rise, continues to be extremely limited. Inventory growth for seniors housing product remained at.% in the fourth quarter, for the second consecutive year. This marks the lowest level in eight years. Absorption for the same period (.%) nearly doubled this growth, suggesting not only continued increases in occupancy but also the need for new construction. It has been reported that several national debt programs have been initiated and that debt product for construction will be more available in. This may be the catalyst needed by local and regional finance companies to re-enter the space. % % % % % Age + Age + Total U.S. Debt Capital Readily Available In, the seniors housing market saw significant diversification among both lenders and financing structures. While the ongoing consolidation via REIT acquisition continues to shrink the financing market, within the space, the availability of low-cost capital has been leveraged in multiple execution structures. The continued prevalence of balance sheet lenders in the sector, Capital Markets Multi-Housing Annual Market Report

15 coupled with renewed activity in the sale of mortgage-backed instruments (both CMBS and Fannie Mae and Freddie Mac loan sales) provided the seniors housing sector with multiple solutions for mortgage financing. Life companies, national bank platforms and private equity continue to arrange bridge loans and acquisition financing for non-stabilized properties. Further, public companies, most notably REITs, had tremendous success accessing unsecured debt and equity through the Initial Public Offering process in. Fannie Mae, Freddie Mac and HUD all remain committed to the seniors housing space. HUD successfully originated more than $ billion in new financings during the year, while Fannie Mae originated approximately $. billion and Freddie Mac originated approximately $ million. Borrower interest rates remained low by historical standards based on both low benchmarks (US Treasuries and Freddie Mac reference bills) as well as investor, guaranty and servicing spreads. As the fourth quarter of came to a close, however, Fannie Mae, Freddie Mac and HUD all experienced rising spreads. Even with these increases, however, the all-in cost of long-term, non-recourse agency financing remains extremely attractive. Interestingly, while REIT acquisition activity served as a limiter to new finance activity, many long-term leases executed in - with options to purchase or buy back from the REITs resulted in new debt executions. Much to the dismay of the REIT landlords, the options negotiated with the execution of the original lease terms allowed lessees to repurchase assets at what would today be considered below market. Further, many REIT acquisition opportunities came with the assumption of existing financing. With benchmarks as low as they have been, yield maintenance and defeasance costs precluded acquirers from retiring many mortgages. This assumption activity is not included in new origination totals. Transaction Volume Decreases The transactional marketplace in was predicted to be far less active than in, a record year. True to form, the first three quarters of saw the completion of 9 deals (across all property classifications), less than half the level experienced in (). According to Real Capital Analytics, approximately $. billion in seniors housing was acquired in, with another $. billion in skilled-nursing. In, transactional volume was less than $ billion in the U.S. Notably, however, more than large transactions were completed with U.S.-based REIT equity overseas, representing an additional $. billion in volume. It is apparent that the overseas activity was the result of continued interest to invest capital within the healthcare space, regardless of location. Despite diminished activity and volume, the seniors housing sector is attracting new capital daily. Given that traditional multi-housing and other core real estate types have far more aggressive pricing and significantly lower yields, the economics of seniors housing continue to attract investment interest based on relative return yields. However, the addition of new capital interests to the seniors housing space could foreshadow a valuation bubble. When desire to invest in higher-yielding asset classes eclipses the risks associated with that asset class, a misalignment of interest is created. Investment entities that acquire high-cost assets without weighing risk relative to yield may find those investments too risky to succeed. While this has not yet occurred within the seniors housing space, this scenario may play out here in the coming years. Compared with previous years, average cap rates within the sector fell significantly in. The average overall cap rate was 9.%, according to NIC. Through the first three quarters of, the average overall cap rate fell bps to.%. For the independent-living segment, the cap rate fell from.% to.%, while assisted-living experienced an even more dramatic drop: from 9.% in to.% in. In the skilled-nursing arena, the cap-rate decrease was nominal, from.% to.%. When the other data points of transactional activity and volume are considered, one would conclude that demand has not diminished. On the contrary, buyers are paying more, and demand is outpacing supply. Outlook The outlook for the seniors housing sector in is that operational performance will continue to improve, given the tremendous lack of new product being developed. As the U.S. economy begins a period of growth (albeit slow) improved relative end-user economics coupled with an increased supply of age-qualified residents will cause stabilized occupancies to tick up toward 9%-9%. Barring any real inflation or other external forces, such as increased insurance, labor or food costs, margins should continue to improve. The extremely low growth projections for the development of new product will continue to positively impact occupancy. Conversion of existing facilities from lower levels of care to higher levels will continue as the aging in place model creates greater demand for assisted-living and memorycare assets. Demand for product at the institutional level seems markedly constrained by product availability and pricing. As such, pricing appreciation is predicted as a result of lower cap rate valuations. Given the current economic climate and the corresponding operational results within the seniors housing industry, the sector will continue to generate further organic operational efficiencies and attract new capital sources seeking yield. Consolidation will continue; however, portfolios that have not been transacted will need to show operational expertise and demonstrate capabilities to generate consistent returns year after year. The retail fundamentals of the industry continue to demonstrate the necessity of expansion of capacity; however, until debt capital for construction and development returns, the sector will suffer from a dearth of new product.

16 Overview Student Housing Outlook The student housing industry continues to experience tremendous growth as more students attend -year universities. Sales volume in marked the highest seen in the industry to date, totaling over $. billion. Many investors are moving into the space due to yields at - basis points (bps) above conventional multi-housing. Concurrent to the increased interest drawn from new entrants into the space, development has spurred with approximately, beds being delivered for the / school year. Enrollment Growth With enrollment growth expected to continue trending upwards, reaching nearly million by, demand for housing around universities will continue to increase. Almost % of rental market growth is coming from the Echo Boom generation, or Generation Y, comprised of individuals aged -. Generation Y is the largest segment of the population, currently making up % of the total US population. In addition, this segment will continue to grow as most new immigrants arriving in the United States are young adults who will continue to boost enrollment with first generation college applicants. Echo Boomers enrolling at post secondary institutions around the country are pushing current on-campus housing stock to the limit, and universities are struggling to keep up. As state and federal funding diminishes, and as endowment funds lose value, universities across the country are finding it more difficult to add on-campus housing to meet growing demand; this pent up demand will force more students off-campus, driving rents and ultimately values of student housing assets. Pricing Trends National student housing pricing trends on a per bed basis reached a record high of $, in. The per bed pricing trends are calculated on a weighted average; the seven largest transactions of the year occurred in the second half of the year and achieved high per bed pricing, driving up the weighted average. Over the course of the first half of, pricing trends appeared to have decreased below the levels achieved in recent years; however this initial appearance was misleading, as unlike prior years, no core deals transacted during the first half of. The second half of the year benefited from a multitude of core transactions. On average, core product traded for $9, per bed, with pricing ranging approximately from $, per bed to $, per bed. The student housing asset class continues to perform exceptionally well under recessionary pressures and proves to be a recession resistant property type in comparison to many other investment grade real estate types. student enrollment in -year degree-granting institutions #of Students (in thousands) Total Enrollment 9 surpassed the peak prerecessionary levels achieved in in regards to the number of properties traded and total dollar volume of transactions. SOURCE: National Center for Education Statistics Capital Markets Multi-Housing Annual Market Report

17 pricing trends per bed $, $, $, $, $, $ Source: CBRE transaction volume 9 Source: CBRE student housing vs MULTI-HOUSING cap rates 9.%.%.%.%.% $, $, $, $, $, 9 Pricing Trends Per Bed 9 9 Q Q Q Q Q Q Q Q Q Q Q Q Q9 Q9 Q9 Q9 Q Q Q Q Q Q Q Q Q Q Q Q $,9 $, $,9 $, $, Number of Transactions Number of Properties Number of Portfolios $Volume (Millions) Transaction Volume Deal volume in outperformed that of in all metrics, with dollar volume up % and number of properties transacted up % over levels. Moreover, surpassed the peak pre-recessionary levels achieved in in regards to the number of properties traded and total dollar volume of transactions. Notably, the majority of transaction volume, both in regards to the number of assets and dollar volume, traded during the second half of. Transaction volume during the first half of was abated by a spike in closures at the end of and owners choice to withhold their core assets from the market until after rent rolls finalized in the fall. Comparable to, year end experienced heightened activity, as % of trades closed in December. It is important to denote that two of the ten portfolios traded during accounted for $.9 billion in transaction volume and properties. Yet, without these two portfolio deals, transaction volume maintains its gain over by properties and $ million in transaction volume. CBRE anticipates that will be a record year for transactions due to the large spillover of assets marketed in that closed in the st quarter, anticipated portfolio activity and the large delivery pipeline for the / school year. Cap Rates Student housing transactions have traded on average at.% cap rates during ; new developments less than a half mile from campus traded at mid-%, while deals encumbered by above market debt experienced % cap rates due to investors solving for a cash-on-cash. Core deals located within walking distance to campuses in major MSA s see interest at cap rates in the % range. Year-over-year cap rates continue to remain well below the peak of.9% experienced in the first quarter of 9. The slight uptick that occurred over the first two quarters of this year is a result of the type of assets that traded during these quarters. As the market became flush with core transactions during the second half of the year, cap rates lowered to the.% average attained in the fourth quarter of. A high degree of variability in student housing cap rates is commonplace due to the small universe of trades in comparison to conventional multi-housing. SH Cap Rate MF Cap Rate Source: CBRE and RCA

18 Overview Seller Profile (Based on Aggregate Transactions) The seller profile of is substantially different from that of. Notably, private capital sales saturated the market with an increase to % of aggregate transactions from % in. The majority of private transactions occupied the first half of the year. Moreover, lender/servicer and REIT sells both decreased from 9% of the market to % and %, respectively; institutions did not account for any transactions in. Developer and fund transactions both increased in. Developers accounted for % of aggregate transactions in, with % of those transactions occurring in the second half of the year. Similarly, % of fund transactions occurred in quarters three and four. % % % % % Buyer Profile (Based on Aggregate Transactions) In line with trends over the past two years, aggregate transactions were dominated by private capital groups, which accounted for % of total transactions. Funds consumed an additional % of transactions over that of year-end, increasing to %. REITs maintained their % share of aggregate transactions when accounting for portfolio trades as one transaction. Institutions and university purchases both decreased to % of transactions. % % % % % Seller Profile (Based on Transaction Dollar Volume) The seller profile of was dominated by developer and fund dispositions. Developers % share of transaction volume was in line with ; however, funds experienced an increase from % to 9% due to one major portfolio transaction. Although it is not anticipated that funds will sustain this extreme elevation in share of disposition volume, CBRE does expect to see continued emergence of portfolio transactions in the market place as new capital seeks to enter the market with substantial portfolio purchases. It is also important to note that troubled assets have nearly cleared the market as lender/special servicers market share decreased from % in to % in. % % % 9% % % Buyer Profile (Based on Transaction Dollar Volume) REITs consumed % of the transaction volume in. The sector experienced the drastic % increase over due in part to three major portfolio acquisitions. As previously mentioned, CBRE foresees the acquisition of portfolios from a variety of market sectors as interest in the market continues to expand. While the charts give the impression that fund and private investors substantially decreased their market activity in, the total dollar volume of acquisitions for each sector was in line with levels. In fact, funds acquired $ million more of assets in than. % % % % % % Developer University Private Capital TIC Lender Services Operator/Fund REIT Institutional Source: CBRE Student Housing Group Capital Markets Multi-Housing Annual Market Report

19 Manufactured Housing Outlook As today s commercial real estate investor scrambles to uncover highyielding, recession-proof investments and value, a newfound attraction to manufactured housing is emerging. Over the past two decades, this has become one of the best-performing asset types, due to its passive nature and strong cash flow. Although the industry has lost several of these manufactured home communities (MHCs) to infill development, there has been little to no new construction over the past years. The well-maintained communities will continue to provide an affordable lifestyle for their residents, especially as many consumers are in real need of less-expensive housing alternatives. While most investors expect Class A communities to sell for basis points (bps) higher than Class A apartments, the reality is that most Class A MHCs actually trade on par with, or within - bps of, apartments of comparable quality. The combination of limited supply, high demand and Fannie Mae financing for well-managed and well-occupied Class A communities has held cap rates down. However, today it is common for Class B, C and D communities to trade with cap rates between % and %. Today, of the approximately, MHCs in the U.S., roughly, are investment-grade (-plus spaces). Ownership of investment-grade communities has become increasingly consolidated, with the largest owners controlling approximately % of the sector. Despite consolidation, the industry still remains fragmented, with offers to acquire communities both from individual property owners and through dispositions from larger owners rationalizing their portfolios. According to a recent survey conducted by JLT Associates, the national occupancy rate is 9% for -and-over communities and % for all-ages communities. Average adjusted rents for both categories saw increases between and, with -and-over communities inching up.% to $ per month, and all-ages communities rising % to $ per month. Several factors have changed the way owners of MHCs do business, resulting in increased opportunities. In the 9s and 99s, it was common for dealers to pay owners to bring homes into the owner s community. This trend changed with the demise of the chattel lending market in the early s, and it is now more challenging to fill communities. Today, community owners are purchasing homes for lease or lease to own in order to fill a vacant lot. This requires significant capital and has put tremendous pressure on many operators balance sheets. Year-to-date regional shipment Market Share Destination Pending.% Pacific.% Mountain.% West South Central.9% New England.% Middle Atlantic.% East North Central.% East South Central.% West North Central.% South Atlantic 9.% total Total rank state MH units* Florida,. texas,. north carolina,9. CAlifornia,. Georgia 9,. South carolina,99. Alabama,.9 Arizona,. 9 MICHIGAn,. tennessee,. *Estimated unit count by state,

20 Overview Many experts expect manufactured housing to continue to experience strong growth as a result of the recent financial crisis. Third-party financing for MHCs has traditionally been obtained from the following sources: Fannie Mae, CMBS, local banks, life insurance companies and owners. CMBS and local-bank lending have filled the void for the Class B and C MHC properties. CMBS loans currently account for more than, active loans, representing several thousand MHCs. Conduit lenders have a strong appetite for MHCs because they have difficulty competing with Fannie Mae on apartment loans. As MHCs qualify as multifamily properties, they provide much-needed diversification in conduit loan pools. Interest rates remain highly attractive to investors, which continues to drive values. In the U.S. on the West Coast, throughout the Eastern seaboard and in Florida, as well as across Canada, cap rates are currently at or below levels for high-quality, well-located properties. Community sales pricing for similar-caliber properties in the Midwest has almost returned to prior levels. New development is economically not feasible, and financing for these communities is at all-time lows. Many experts expect manufactured housing to continue to experience strong growth as a result of the recent financial crisis. Feeling the adverse effects of the economy, many people continue to seek new affordable housing alternatives and a second chance at homeownership. This trend will allow the existing communities that have experienced increased vacancy to achieve much higher occupancy and NOI growth in the coming years. Capital Markets Multi-Housing Annual Market Report

21 Low Income Housing Tax Credit Outlook During, CBRE s National Tax Credit Advisory Group continued to observe several trends pointing to an improved affordable housing market. The market remained strong through the economic downturn, and that pattern continued into. Capitalization rates for affordable property acquisitions continued to drop, with the coastal regions seeing the strongest growth. After a period of volatility that stretched into the beginning of, tax credit pricing seems to have settled in most markets. While affordable housing finance faced many headwinds, several developments offset these factors and the market for new developments remained mostly stable for. However, several challenges still remain for. Demand for tax credits continued to grow in the beginning of, driving down yields at one point to below % for some funds. This movement began to drive out some economic investors in the LIHTC industry, causing demand to decrease and yields to rise. But the exit of these investors was partially offset by the presence of many banks seeking to meet Community Reinvestment Act (CRA) targets. By the end of the year yields once again rose and many economic investors re-entered the market. However, some factors warrant caution in the tax credit market for. The huge economic impact of Hurricane Sandy had some insurance companies reevaluating their interest in purchasing additional tax credits, with many firms assessing whether they will be able to utilize the credits they presently own. In addition, many banks are nearing the end of their CRA exam cycles, and the interest in purchasing additional credits for developments in CRA targeted markets may wane. These two factors may lead to an additional drop in credit pricing and rise in yields. However, these developments are partially belied by The American Taxpayer Relief Act, which locked in the 9% rate for low income housing tax credits, and was passed by Congress earlier this year. In addition, the New Issue Bond Program (NIBP) has helped to resuscitate the % credit market in. Currently, tax credits are trading in the high s to low 9s range. The possible drop in available equity for new developments and re-syndications will put additional pressure on federal and state funding sources. Interest rates remained historically low throughout, and state and federal funding of tax credit developments remained stable. HUD rolled out a new pilot program to expedite FHA funding of developments that utilize tax credits. That program was initially started in four offices, but has since expanded making it a national program. In addition, it implemented the Rental Assistance Demonstration (RAD) program. The RAD program seeks to facilitate the preservation of the nation s existing affordable housing stock. In the same vein, many state agencies are shifting focus to preservation, as costs for new developments are coming under increasing scrutiny and the agencies are seeking to increase cost control in their Qualified Allocation Plans. may see a different picture. Most states continue to see constrained budgets and this will affect the availability of soft debt. At the federal level, the sequestration and continued deficit reduction measures will reduce the availability of federal funds for new and existing projects. This will make many new developments and rehabs infeasible. In, some, projects constructed with low income housing tax credits will be exiting their initial compliance periods. Many of these projects will require rehabilitation to continue successfully operating as affordable developments. Despite funding concerns for this year, there are many reasons to be optimistic. LIHTC projects are still a very strong investment, with foreclosure rates averaging less than % during the economic downturn. Interest rates are expected to remain low until the end of. While demand for single family housing has increased, the demand for rental housing has remained steady, and is projected to be stable for the year. Many investors are harboring cash seeking safe investments. To that end, GP acquisitions will continue to grow as investors seek alternatives to fee simple transactions. Currently GP sales yield returns in the mid to high teens. One thing most analysts agree on is that as tax reform and deficit reduction measures loom, advocacy is key to preserving the low income housing tax credit. Section is the most successful affordable housing development program in the country, and its continuation is essential to maintaining an adequate affordable housing stock. 9

22 international highlight Canada Market Highlights The Canadian multi-housing market remains exceptionally appealing to existing and prospective investors. Canada s multi-housing market continued its robust performance in with exceptionally low vacancy a trend seen across the country and steady rental growth, making it a landlord s market. Rental growth was positive in almost every market, as well as the nation as a whole, surpassing the core inflation rate. Investment volume for multi-housing assets surged in due to significant interest from REITs and REOCs, and cap rates continued to compress. The national vacancy rate increased basis points (bps) year over year to reach.% at year-end, but remained below the -year average of.%. Canadian economic growth was positive but mild amid continued global economic uncertainty. Few areas of the country experienced multihousing fundamentals that could be described as weak or even stable in. Despite marginal increases in vacancy, most markets witnessed rental rate growth. Economic growth has been concentrated primarily in the resource-rich provinces of Western Canada, resulting in a westward migration from other provinces and an increase in foreign immigration. Vancouver and Calgary have each demonstrated -year average growth rates in net migration of.% and.%, respectively. By comparison, in Toronto s net migration fell to levels not experienced since the late 99s, representing a -year average growth rate of -.%. This was, however, less dramatic than in, when the rate was -.%. As a result of a surging economy and booming population growth, vacancy rates in Calgary and Edmonton continue to decline steeply from their recessionary peaks. The Calgary vacancy rate has fallen bps from.% at mid-year 9 to.% at year-end, while Edmonton vacancies have dropped bps from mid-year to.%. These were the Canadian markets hardest hit by the recession. In, both Calgary and Edmonton defied the national trend of rising vacancy rates, with vacancy declining bps to.% and bps to.%, respectively. The strong economic outlook and demographic trends are expected to support multi-housing demand in these markets over the short and mid-terms. Canadian multi-housing cap rate 9% % Cap Rate (%) % % % 9 Source: Canadian Real Estate Association Multi-Res - B Capital Markets Multi-Housing Annual Market Report

23 Elsewhere in Western Canada, Manitoba remained one of the tightest markets for multi-housing product, with a vacancy rate of.%, the lowest provincial average. This was driven by steady markets such as Winnipeg and Regina, which posted respective vacancy rates of.% and.%. Despite the dearth of vacant space, both municipal markets and the province recorded significant increases in vacancy in. Demand for rental housing moderated in Vancouver, with vacancy increasing by bps year over year to.%. This countered forecasts, which estimated Vancouver s multi-housing market would see the vacancy rate fall to just.%. Both economic growth and the demand for rental housing were considerably tempered in Eastern Canada in. A slowdown in immigration to Toronto pushed the vacancy rate up bps over the prior year to.% in. (However, it should be noted that was an unusually strong year for the multi-housing market; Toronto s vacancy rate was.%, the lowest level in years.) On the heels of, every province in the East recorded an increase in vacancy, with New Brunswick and Prince Edward Island experiencing significant increases of bps each. Saint John, New Brunswick remains the softest market in Canada, with a vacancy rate of 9.%. Sudbury, Peterborough, Thunder Bay and Windsor, in Ontario, were the only major municipal markets east of Manitoba to record a decrease in vacancy in. The fundamentals of the Canadian multi-housing market point toward sustainable growth with moderate volatility as supplyand-demand forces align.

24 international highlight Canada s national average rental rate grew by.% in, topping the annual inflation rate of.%. Canada s national average rental rate grew by.% in, topping the annual inflation rate of.% as measured by the Consumer Price Index published by Statistics Canada. Local inflation concerning specific regions was the highest in the Maritime Provinces. However, this is offset as the Maritimes averaged.% in rental growth for, significantly higher than the national average. Prince Edward Island led the country s rental growth at.%, followed by Manitoba, at.%, and Alberta, at.9%. Quebec was the only province to report negative rental growth, with major municipalities such as Montreal and Saguenay recording rental rate depreciation of.% and.%, respectively. The provinces west of Ontario averaged annual growth of.%, led by Saskatchewan and Manitoba at.% and.%, respectively. Average rents in Alberta grew by.9%, while British Columbia s increased by.%. Ontario markets saw average rental growth of.% in, with Oshawa the only major municipality to report a decrease. Toronto was consistent with the provincial average, recording growth of.%. Thunder Bay outperformed the province with growth of.%, the second-highest in the nation. At the end of, the national average for a two-bedroom apartment was C$9 per month, with significant regional variation. A unit in Ontario, Alberta or British Columbia commanded an average monthly rent ranging between C$, (Ontario) and C$, (Alberta); the remaining provinces ranged between C$ per month (Quebec) and C$99 (Nova Scotia). As the U.S. economic outlook improves, the manufacturing sector in Canada is expected to strengthen, which should reduce the discrepancy in rental growth and vacancy between the manufacturing-based provinces and those characterized by a high concentration of natural resource industries. Capital Markets Multi-Housing Annual Market Report

25 Multi-housing Sales Volume In, multi-housing transactions were closed, totaling C$. billion. While the number of transactions was up only slightly from the tally, volume was up.% from the prior year s C$. billion. Institutional and foreign investors remain highly interested in the Canadian multi-housing market, but the lack of available product coupled with the dominance of private buyers and now REITs and REOCs has made investing in this product type very challenging. Private buyers accounted for.% of the multi-housing investment volume in, down from.% in and.% in. The drop was due to increased demand from REITs and REOCs, which accounted for.9% of the volume, up from 9.% in and.% in. REITs have been able to make headway in this market due to the ample capital at their disposal. The Canadian Mortgage and Housing Corporation (CMHC), Canada s national housing agency, will continue to support private buyers by providing inexpensive financing, despite talk of a cap. Loan-to-value ratios of up to % are available to purchase product, and CMHC lending rates consistently bested those offered by conventional lenders. Foreign investors did establish a bigger presence in the multi-residential space this year, accounting for.% of total multi-residential investment volumes. The portion this year is double that of s but still miniscule compared to pre-recession levels where foreign investors accounted for over % of the country s total multi-residential investment volume. The biggest challenge to the continued growth of the Canadian multi-housing market in the last decade has not been economic difficulties, but rather a rush to homeownership. However, rising home prices across the country, including dramatic increases in major markets, have recently pushed many people out of the single-family market. This is expected to drive a resurgence in multi-housing rental demand. The size of the rentable universe is unlikely to see any significant increase as new apartment starts are heavily weighted towards ownership structure; however, the shadow rental market (privately owned condominium units being rented out) has experienced growth over the past few years, adding to future supply. Ottawa, Toronto, and Vancouver saw.%,.% and.9% of condominiums being used as rental housing, respectively, in, with each market growing during the year. Calgary and Edmonton recorded respective shadow rental market rates of.% and.%, growing significantly more than the aforementioned cities. Montreal and Quebec City have substantially smaller shadow markets, at % and 9%, respectively, but also demonstrated the trend of growth in condominiums for rental housing that is being witnessed nationwide. The trend of growth in the shadow rental market is expected to continue, at least in the short and medium terms. A significant number of condominium units are due to come online in and, and municipalities push planning reform towards intensification and maintain incentives for construction of ownership as opposed to rental units. The fundamentals of the Canadian multi-housing market point toward sustainable growth with moderate volatility as supply-and-demand forces align. With historically low vacancy rates, there is little room for improvement in occupancy, and therefore a cycle of supply will be needed to mitigate demand pressures. The most important factors to influence multi-housing fundamentals will be immigration and the trend of intensification of urban centers. Sales Volume (C$ Billions) $ $ $ $ $ $ toronto and national immigration Source: CBRE Ltd. and CMHC RENT GROWTH AND VACANCY RATE Rent Growth Vacancy Rate Note: There is some form of rent control in B.C., Manitoba, Ontario, and Quebec Source: CBRE Ltd. and CMHC 9 COOLING HOUSING MARKET BOOSTS MULTI-HOUSING DEMAND Number of Deals Sales Volume ( L ) Number of Deals ( R ) Source: CBRE Ltd. and RealNet Canada Net International Immigration % % % % % % % Resale Home Price (C$),,,, $, $, $, $, $, $, $, $,, Toronto Canada $ , % % % % % % % % % Average Resale Home Price ( L ) Sales to Listings Ratio ( R ) 9. Sales to Listings Ratio Source: Canadian Real Estate Association

26 international highlight United Kingdom Market Highlights CONTINUED DEMAND AND STRONG RETURNS FOR PRIVATE-RENTED SECTOR Recent improvements in the U.K. mortgage market have marginally increased the availability of credit for first-time buyers. However, this does not go nearly far enough to curtail the tide of interest in multifamily rental housing, referred to as the private-rented sector. As a result, tenant demand is increasing. In addition, investor demand is growing as residential returns continue to outperform those of other asset classes. Government intervention in the multihousing sector is beginning to make the market more accessible to developers and institutional investors. London remains a key rental investment hotspot and will continue to dominate investment and development strategies. A Changing Tenure Landscape The private-rented sector has shown a dramatic increase in both size and significance since the last census, with. million households added over the last decade. It now accounts for.9 million households across England and Wales. The shift away from homeownership has pushed private renting s share of total households from % to %. Growth has been heavily weighted toward London and the South East, which together account for more than % of the total increase. The increase in this sector reflects both the buyto-rent boom in the early part of the decade and the financial constraints during the latter part. The pace of growth looks likely to continue given that the main supply-and-demand drivers continue to be relevant. The rate of household formation of which the majority of individuals fall between the ages of and is far outpacing the rate of homebuilding. This has had a significant impact on the multi-housing sector. Last year, fewer than 9, homes were built in England, well under half the required level. This, coupled with the increasing population, is cushioning house prices and creating further income and wealth constraints for potential first-time buyers. Tightening of mortgage criteria and rising deposit requirements are also impacting the fluidity of the market, with first-time buyers particularly affected. While, loans were made to first-time buyers in (the highest level in five years), we estimate that approximately, first-time buyers have been priced out of the market since. In addition, the sector is being underwritten by a substantial student population, particularly in major towns and cities where there is insufficient build-to-suit accommodation. There is also a shortage of social rented (affordable) housing, forcing tenants receiving housing benefits into the private-rented sector. The View From London: A Growing City Demand for living space in London has increased by % (, residents) since, with the population now approaching. million. Yet just, new homes have been built during that time period. This dearth of product is contributing to an increase in average household size, from. persons in to. persons a decade later. It is also putting pressure on prices, which have increased by more than % over the same -year period. In contrast, average earnings have increased by just %. As a result of these factors, homeownership in London is, for many, out of grasp, and the city is increasingly becoming one of renters. In the U.K., London has by far the highest share of households privately renting, at % (eight percentage points higher than the next-highest region, the South West). This expansion of the renter pool will continue unless government intervention significantly frees up mortgage markets. It will take those already renting and aspiring to be home owners years on average to save for a deposit; this number jumps to years for those living and buying in London. Capital Markets Multi-Housing Annual Market Report

27 Although average yields are generally lower in London compared with regional towns and cities, capital growth prospects are projected to be stronger, contributing to higher total returns. This should play into the hands of investors who are looking to diversify portfolios and to enter a lower-risk, higher-return sector. London s population is expected to increase by. million by the next scheduled census in. The age group dubbed as Generation Rent is expected to expand further, and swell by, during the same period. If current trends continue including rising residential values, bigger deposit requirements and increased confidence in employment markets rental demand could balloon. To match anticipated demand, London will require both investment in existing rental stock and the delivery of additional build-to-suit rental product. Less Risk, More Reward Appetite for multifamily rental stock has started to edge back up among buy-to-rent investors; mortgages for rental housing investments were up 9% over, accounting for % of all current outstanding mortgages. Interest is also increasing from institutional investors, both domestic and foreign. Within London, Westminster has the highest share of renters, at nearly %. This is closely followed by Kensington, Chelsea and the City of London, three of the country s most expensive residential areas. At a more granular level, renters choose to be located around transportation hubs and proximate to central employment zones. Unsurprisingly, the most prominent rental locations have a high share of renters in the -9-year-old range, the typical rental demographic. For example, in parts of Shoreditch, rental households account for % of all households, and half the population falls within the aforementioned age category. Developers and investors will continue to seek opportunities in these established rental locations. In contrast, given its limited access to the tube network, parts of Bromley are less favorable for investors, as only % of all households rent and only % of all residents fall within the -9 age bracket. The pressure from additional rental demand is contributing to increasing rental values. Rents have reportedly increased by more than % per year for the past four years. Even stronger growth has been achieved in lower-supply markets across Zones and. A driving factor is the continued outperformance of the sector and the accompanying maturing and comprehensive performance data. Residential returns from large-scale private rental portfolios outperformed that of all other commercial real estate property types during for the fourth time in five years, according to IPD. Average annual returns for residential product totaled.9% in, split between capital growth of.9% and income return of.%. This reflected rental growth of.%. In contrast, commercial real estate portfolios had total average returns of.% (.% for office,.% for retail and.% for industrial).

28 international highlight Performance Gap As in the owner-occupier market, the positive performance of the private-rented sector in the U.K. has been driven by the London market. This reflects the underlying demand factors mentioned earlier. Demand factors aligned with demographics and employment has resulted in Inner London (Zones -) being the bestperforming region in the U.K. with total returns of.%. This is a well-connected market predominantly serving young professionals. Inner London is followed closely by Central London (.%) and Outer London, Zones - (9.%). Strong rental growth of.% across Inner London has also matched capital growth (%), preventing yield compression and maintaining the attractiveness of the sector. As with commercial real estate markets and the more mainstream housing indices, there is polarization of the residential private rental market. Outside the M motorway, residential returns are less favorable. In, drops in capital growth were recorded across the South East for the first time since the market contraction, and total returns did not reach beyond.% for any region outside London. However, rental growth has remained positive, favoring investors seeking high-yielding properties. Favorable Risk Profile Given continued favorable returns, investors are moving more and more toward diversifying real estate portfolios with residential components. IPD data show annualized returns for residential of.% over the past years, compared with.9% for retail and.% for office. In addition, the returns from residential continue to be considered less risky, as measured by the volatile of returns over time. Confidence Among Investors Experienced developers and institutions will play a more significant role as the market evolves and fund managers look to diversify portfolios by adding high-returning residential to their existing stock. Demand is expected to endure, given the House Building Federation s findings that deposit raising will continue to be an issue for Generation Y. It will take those already renting and aspiring to be home owners years on average to save for a deposit; this number jumps to years for those living and buying in London. However, a number of underlying risks could limit the U.K. s multi-housing sector at scale or slow the rate of growth. The withdrawal of government stimulus, increased regulation and the introduction of rent controls are potentially prohibitive obstacles for institutional investors. For investors buying into the sector for an income stream, rather than a pure capital growth strategy, rent controls pose the biggest threat. Increasing Investment Appetite The inherently strong market dynamics, coupled with strengthening demand and relatively inefficient, poor-quality stock, has led to a marked increase in investor interest during the past year, both domestically and internationally. Residential returns continue to outperform other sectors: averaging.% per annum over the past years, compared with.9% for retail and.% for office. Capital Markets Multi-Housing Annual Market Report

29 In addition, there has been a rise in activity from registered affordable housing providers (known as social housing in the U.K.), such as London and Quadrant. The publication of the Montague report in August which offers proposals aimed at boosting and encouraging professional investment in multi-housing assets has added to the momentum in the sector. The main focus for U.K.-based investors is finding the right vehicle to access the market, and the right product to purchase. Most importantly, the asset will need to achieve management efficiencies in order to be viable, and will need to attract the desired demographic and drive rents. Interest from overseas investors is mounting because of both the underlying economic and political fundamentals offered by London and the U.K., as well as the opportunities inherent in the sector. Build to Rent The build-to-rent sector has not yet made a meaningful contribution to supply. This mainly reflects issues around development viability. Uncertainty surrounding private landlords capacity to meet growing demand adds to the supply pressure. It is in this context that increased interest in build-to-rent developments is emerging, increasing and diversifying the level of rental supply. Key to success in this area is the development of large-scale rental portfolios to make a significant contribution to rental supply. Long term capital from institutional investors, including pension and insurance funds will be key. Office to Residential The U.K. government recently announced its intention to introduce permitted development rights that will allow conversions from office space to residential without the need for planning permission. The new initiative is one of a number to encourage economic growth and promote the delivery of more housing. Landowners and developers will, in due course, be able to take advantage of this initiative, which could facilitate and expedite the growth of rental portfolios. Changing the planning process could exclude, perhaps most significantly, the provision of associated affordable housing, and matters such as unit size and mix. Developers will undoubtedly want to consider what this might mean for their own portfolios. The impact of these changes on the supply of new housing in certain areas could be significant. Government Signalling Further Support The U.K. government has signaled renewed support for the private-rented sector by establishing an expert taskforce to support investors and boost awareness. The government, and the political opposition, acknowledges the important role that rental accommodation will have on meeting housing need in the future, and sees the regeneration opportunity of buildto-rent development. The taskforce, and future government policies to be announced prior to the general election, will aim to bring sustained and long-term growth to the sector.

30 case studies West th Street New York, NY Transaction date: June Loan amount: $9,, Number of units: CBRE s New York Institutional Group represented Rambleside Holdings in the sale of West th Street in Manhattan. The property was a former apartment hotel; therefore included a high proportion of - bedroom units (%) while market demand was stronger for larger, family-sized units. Prospective buyers were concerned that a certificate of occupancy was in progress for the penthouse and that record-keeping for the rent-regulated units was not up to the rigorous standards of today. The property was owned by the same family for over years, and operations had been focused on keeping high occupancy rather than increasing rents. Apartment finishes were not commensurate with the quality of the property location between Central Park West and Columbus Avenue, and as a result, rents were well below market. In order to overcome these obstacles, CBRE focused buyers on the repositioning opportunity at West th Street. In particular, buyers were shown examples of how -bedroom units could be combined into efficient -bedroom units, which would generate rental premiums. In fact, the buyer planned to implement this strategy immediately. CBRE illustrated that the asset was under-performing due to inconsistent and inferior finishes. Attention was also given to the, square feet of professional space, of which a significant portion was leased to Columbia University at below market rents. CBRE highlighted the scarcity value of such sizable professional space on the Upper West Side and conveyed various reconfiguration options for the ground floor. The result was the highest price on a net per square foot basis ($ PSF) for any pre-war residential asset on the Upper West Side, except for one sold at the height of the market for condo conversion. Capital Markets Multi-Housing Annual Market Report

31 Portland, OR Transaction date: December Loan amount: $,, Number of units: The parker The CBRE Seattle Debt & Equity Finance Group secured nonrecourse construction and permanent fixed rate financing for The Parker, a -unit Class A apartment community located in the Pearl District of Portland, Oregon. The.% of cost loan was originated through CBRE HMF, Inc., CBRE s FHA/GNMA direct loan program at an interest rate of.% for a term of years. The Parker will be built to certified LEED Gold standard and will provide a mix of junior one-bedroom, one-bedroom and two-bedroom units in a single six-story elevator building. Project amenities will include a community room with a kitchen and coffee bar, a fitness center and an outdoor courtyard with seating areas, fireplaces, and four BBQs. Recognizing its location in the transit, bicycle and pedestrian oriented Pearl District, the project will provide a single level underground garage with an automated vehicle stacking system, extensive bicycle storage and a sports room for bicycle maintenance. The CBRE FHA-insured direct loan provided construction financing that will automatically convert to a -year fullyamortizing fixed-rate permanent loan without performance hurdles. CBRE convinced HUD to short cut its normal two step underwriting process by taking the loan application directly to firm commitment saving the borrower time and processing costs. 9

32 case studies University Gateway The CBRE Student Housing Group with the Southern California Multi-Housing Group teamed with the Student Housing Debt and Equity Finance Group to execute the sale and financing University Gateway in Los Angeles, California. This premier, off-campus student housing asset is located adjacent to The University of Southern California (USC). The -unit/,- bed project includes, square feet of fully occupied retail, including the USC Thornton School of Music and School of Policy, Planning, and Development. CBRE s successful transaction of University Gateway was the largest single-asset, third party transaction to date in student housing. The property was developed by Los Angeles-based Urban Partners, which entered into a ground lease with The Shammas Group and USC in June. Urban Partners later formed a joint venture with Blackstone Real Estate Advisors. The RCG/Longview and Wells Fargo Bank completed the project financing, and University Gateway opened in. CBRE closed the transaction successfully after a competing firm was unable to complete the transaction the previous year. At the end of the marketing period, CBRE s Student Housing Debt and Equity Finance team successfully secured the debt for the selected buyer through CBRE s Fannie Mae DUS platform with a -year fixed rate loan. The combination of the investment sales and debt platform for this project provided the seller and buyer with a consistent point of contact for a seamless dissemination of information. Los Angeles, CA Transaction date: October Mixed use: Units ( Beds),, SF retail Capital Markets Multi-Housing Annual Market Report

33 ALTA at K Station The CBRE Chicago Multi-Housing Group and the Chicago Debt and Equity Finance Group teamed up to execute the sale and financing of Alta at K, a LEED Gold Certified high rise residential rental complex in Chicago, IL. CBRE represented a venture between Chicago-based Fifield Companies and Newport Beach-based Pacific Life Insurance Company in the sale. The team secured $ million of agency financing on behalf of Mississauga, Ontario based Morguard Corporation. Alta at K Station is a constructed, two tower apartment complex consisting of residential units, 9 above-grade parking spaces, and,+ SF of high-street retail. The property, located at West Kinzie Street in Chicago s West Loop neighborhood, sits directly on the city s urban rail system on a. acre site. The assignment was initiated in late amid a building boom in Chicago for downtown apartments. Four rental projects were delivered to the market in with another six projects under construction. In addition, the size of the loan request limited the pool of available capital sources outside of agency financing. Chicago, IL Transaction date: December Acquisition price: $,, Loan amount: $,, Equity amount: $,, Mixed use: units,,+ SF Commercial Space & 9 parking spaces

34 case studies CBRE Capital Markets Debt & Equity Finance Group arranged multiple loans exceeding a total of $ billion-plus to finance the acquisition of a portfolio of multifamily assets located in eight markets across the U.S. CBRE worked exclusively on behalf of the borrower, a joint venture between Goldman, Sachs & Co and Greystar, to arrange the individual Freddie Mac loans. The seven-year loans are non-crossed and float over -day Libor. The acquisition of the EQR portfolio provided Goldman Sachs and Greystar with an incredible value-add opportunity in some of the leading apartment markets in the United States. The high-end quality of the entire portfolio is rare. The portfolio encompassed a total of, units, with properties located in Phoenix, Southern California, the San Francisco Bay Area, Denver, Washington, DC, Orlando, South Florida and northern New Jersey. Goldman Sachs and Greystar purchased the portfolio from the seller, Equity Residential, for $. billion, or approximately $, per unit. EQR Portfolio Various markets in six states California, Colorado, Arizona, Virginia, New Jersey, Florida Transaction date: Closed February and March Loan amount: $,,,+ Number of units:, Capital Markets Multi-Housing Annual Market Report