CAPITAL MARKETS MULTI-HOUSING

Transcription

1 CAPITAL MARKETS MULTI-HOUSING Annual Market Report A Special Report from CBRE Econometric Advisors and CBRE Capital Markets

2 ANNUAL MARKET REPORT To Our Valued Clients: These are the good old days for the multi-housing industry. While other commercial real estate is slowly recovering, multi-housing has been sprinting. Occupancies for professionally managed properties nationally are approaching 9%. In, rental increases ranged from % to % or more. All markets, with the exception of Las Vegas, have seen increases in rents. There is an abundance of both equity and debt capital available. However, having said that, not all properties are benefitting equally. The higher-quality, newer, well-located properties in markets from Washington, DC to Ft. Myers, FL have seen significant improvement in net operating income across the country in primary, secondary and tertiary markets. The same cannot be said for older, lower quality properties where the tenant base is more sensitive to rent increases. Well-located urban core properties in the primary markets and gateway cities are the most highly sought after by institutional investors. There is domestic, foreign, institutional and private equity capital for urban core development deals in high barrier to entry markets. Institutional investors are willing to invest in development deals in the gateway cities of Boston, New York, D.C., L.A., San Francisco and Seattle at a.% return on development costs based on today s rents. This is primarily because they don t want to pay a % cap rate for existing product, they have a compelling need to be invested, and like the long-term prospects for multi-housing. However, finding equity capital for a suburban development project is much more challenging. Institutional capital to date has been disciplined as to where it will invest for both existing deals and new development, and has been giving preference to urban infill locations in major coastal cities. There is a liquidity premium being paid for these assets, as institutional investors need to feel that there will be a deep and ready market to sell into when the time comes to liquidate. While cap rates for core institutional quality assets are back down to levels, most investors feel more confident about cap rate levels today. Confidence has been raised by the lower interest rates that have created positive debt arbitrage, along with strong occupancies, a lack of new supply, expected rent growth, favorable demographics, and a continued decline in home ownership. Sales activity nationally for the industry was $ billion, which is similar to the national sales level. In, CBRE sold $. billion in multi-housing and financed an additional $. billion for a total of $. billion in multi-housing transactions. How might this positive outlook for multi-housing be negatively impacted? First and foremost, the future of Fannie Mae and Freddie Mac remains uncertain. However, given that it is a presidential election year, it is unlikely that there will be a resolution of the Agency situation in the near term. Any resolution will likely include a long transition period so as to not create any undue market uncertainty. Secondly, a sudden rise in long-term interest rates remains a concern, although that appears unlikely in. Thirdly, an over-supply of new units could appear in a select few markets, but is likely to be a pause rather than a problem. Finally, some are beginning to question the ability to continue to pass through significant rent increases, which bears watching. We hope that this information, along with the advice from our investment sales and debt and equity finance professionals will help you achieve your investment objectives. We thank you for your confidence in us and look forward to working with you. As always, we welcome your comments and stand ready to put the client first, always. Sincerely, Peter Donovan Senior Managing Director CBRE Capital Markets Multi-Housing Group

3 TABLE OF CONTENTS National Perspective & Outlook Debt & Equity Finance Market Trends Senior Housing Outlook Student Housing Outlook Manufactured Housing Outlook Low Income Housing Tax Credit Outlook Canada United Kingdom Case Studies 9 Regional Highlights 9 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 The U.S. multi-housing market reached an important milestone in : a transition from the recovery phase of the real estate cycle into the expansion phase. Occupancy rates in most markets are not only better than a year ago, but at or near their historical norms with revenues surpassing pre-downturn levels. In this regard, multi-housing is leading other real estate sectors where revenues are % below peak values. The outlook for fundamentals remains strong, with rent and revenues growing at the strongest pace since the late 99s. The top performing markets will be weighted toward areas with concentrations of high-tech employment, with metros such as San Francisco, San Jose, Austin, Denver, Seattle, Portland, and Boston leading in rent and revenue growth. There is still a fair amount of variation in multi-housing performance across markets and types of product. While rents and revenues are above pre-downturn levels in Washington, D.C., New York, Boston, Minneapolis, Chicago, Miami, San Francisco, Philadelphia and Detroit, a number of markets are still in recovery mode, including Phoenix, Atlanta, Los Angeles, Seattle, Houston and Dallas. That said, effective rents are now rising ahead of inflation in most markets and new supply is beginning to show more momentum as a result. While nationally starts still remained well below historical norms as of early, by the end of this year they will be on course to recover to levels averaged over the last years. Judging by the level of starts in, completions will remain about % below the historical norms in nationally, but not across markets. Completions will be above or at 99 averages in San Francisco, New York, Dallas, Houston, Washington, D.C. and Boston, among others. With new supply ramping up, further significant improvement in vacancy will be constrained until the labor market gains momentum. MOST MARKETS ARE IN EXPANSION PHASE Fourth Quarter apartment revenue as % of - peak Washington, DC New York Boston Minneapolis Chicago Miami Midwest ( mkts) San Francisco East ( mkts) Philadelphia Detroit Nation Dallas Houston South ( mkts) West ( mkts) Seattle Los Angeles Atlanta Phoenix Occupancy rates in most markets are not only better than a year ago, but at or near their historical norms with revenues surpassing pre-downturn levels. Source: MPF/CBRE EA, Q CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

5 In contrast to the previous two cycles when jobs were the primary driver of apartment demand, the major contributing factor in this recovery has been rapid growth in renter households. The share of newly formed households captured by the apartment sector was much higher this time, and much of the recent surge in apartment demand was fueled by shifting preference towards renting among the new households. Without this tailwind, it would take much longer for apartment occupancy to get back to norm. With occupancy and rents expanding rapidly while new multihousing completions still remain very low, growth in apartment demand has slowed down from over, units in to about, in across major markets. The largest contributors to national demand growth in were Los Angeles, Houston, New York, Dallas, Chicago, Boston, Detroit, Atlanta, San Diego and Phoenix. The national vacancy rate declined to.%, a -basis-point drop from a year prior. Apartment demand recovery continues to be driven by two factors: job growth and rapid expansion in broad rental demand. Total U.S. employment added about. million jobs, or.%, in. Private services accounted for most of the gains during this period. Most markets are still in early stages of employment recovery, and the U.S. as a whole is still million jobs below the peak reached in first quarter. Even if the U.S. employment continues to add about, jobs per month well below the pace of a typical recovery it will only return to pre-recession levels in the second half of. The depth of job losses during the recession and the prolonged recovery are key factors behind the relatively modest projected pace of growth in housing demand overall as measured by the number of households. APARTMENT DEMAND BENEFITS FROM EMPLOYMENT AND RENTER HOUSEHOLD GROWTH Year-over-year % change Total employment Renter households Apartment demand (occupied stock) Bureau of the Census, CBRE Econometric Advisors. Aggregate growth in housing demand is only one of the factors influencing growth in rental demand, including apartments. Changes in housing tenure, or the share of households that own vs. rent, is another key factor. U.S. rental demand continues to expand rapidly as more existing households shift from owning to renting while newly formed households rent rather than buy. According to the Housing Vacancy Survey (HVS) conducted by the Bureau of the Census, U.S. housing demand grew by, households between fourth quarter and fourth quarter, including, in the West, 9, in the South,, in the Northeast, and, in the Midwest region. During the same period, the national homeownership rate witnessed a drop from.% to %; the homeownership rates declined from % to.% in the West, from.% to % in the Midwest, from.% to.% in the Northeast, and from.% to.% in the South. Overall household formation and the decline in the homeownership rate led to an increase in the number of renter households nationally by

6 OVERVIEW,, including, in the West,, in the South, 9, in the Midwest, and, in the Northeast. Job growth in is expected to be about the same as, yet apartment completions will be more than twice as high. This will likely slow down net absorption further, with vacancy rates remaining flat until jobs growth accelerates in. With the vacancy rate already at the historical norm, subsequent revenue gains will have to rely more on effective rent growth, including the burning off of discounts and concessions. The unknown factor remains foreclosures, which are having a negative impact on home prices, but also fueling growth in overall rental demand and own-to-rent conversions. This trend (also reflected in the declining home ownership rate) is likely to continue in, providing the same boost to apartment demand as in recent years. Assuming that the economy and labor markets continue to recover, foreclosures should begin to dissipate in but will still bring the nation s homeownership rate down to its 9 average of about %. Under a more adverse scenario, however, foreclosures and strategic defaults will intensify, bringing the homeownership rate down below %. While this negative economic scenario will result in stronger growth in the number of renter households compared to the base-case, it will also be accompanied by job losses, slower household formation, and millions of own-to-rent conversions. The overall effect of this would be a less favorable environment for the apartment sector including higher vacancy rates and less robust rent growth. Apartment properties in markets and submarkets with a greater concentration of single-family homes for rent are more exposed to this risk, so the impact is likely to be greater in suburban locations. In our view, the apartment sector would be better off over the next five years with a steady growth in employment and a healthy housing market than without them. As the U.S. economy improves, most of the growth in the nation s rental demand is likely to come from total household formation, as has been the case historically, rather than from declines in the home ownership rate. A combination of high housing affordability and an improving job market should finally unleash pent-up owner demand and lift both home prices and rents. If owner demand does not recover as expected, however, the resulting rapid expansion in rental demand will probably be offset or even exceeded by a rental supply increase in the form of new construction and own-to-rent conversions a pattern that was observed during two periods of declining homeownership rates: 9 9 and Present. Multi-housing investors should pay attention to these trends as apartment vacancy rates actually followed increases in single-family vacancy rates across markets during both periods. Beyond the near-term horizon, apartment properties in areas with higher unemployment, higher single-family affordability and/or high single-family vacancy rates are expected to face stronger headwinds to performance. The multi-housing expansion will solidify in driven by new jobs and renter households. Given the strong fundamentals, development is bound to pick up, but it will still take a year or so for completions to return to historical norm nationally and longer in some markets. The sector should maintain stable occupancy and moderately strong rent growth after as long as new multi-housing supply remains in line with the fundamentals. Aside from PROPERTIES TOTAL SOLD PRICE,9 $,,,, $,9,,,9 $,,,,9 $,,,99, $9,,,, $9,9,,, $,,,, $,,,9, $,,9,9, $,,,,9 $,,9, Source: Real Capital Analytics. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

7 growth in employment and incomes, affordability of single-family homes (including rentals) relative to apartments will be an important factor impacting rent growth across markets, submarkets and individual assets. Investment Sales: Volume Returns to Pre-Recession Levels To most recent industry surveys, multi-housing is now viewed as the most favorable property type for real estate investment. Current pricing reflects this strong investor sentiment toward apartments: it is the only sector where the national average transaction-based cap rate is back to the levels seen before the financial crisis in. Supported by real estate fundamentals, sales of investment-grade apartments totaled $. billion in, a % percent increase over the prior year. Garden-style apartment product led the recovery in sales, accounting for over % of the total growth. The overall activity has picked up significantly in fourth quarter with a sales volume of almost $ billion, the strongest quarter since the end of. Stronger investor demand for apartment properties compressed the average transaction-based cap rate to.%, a basis points decrease from. Geographically, institutional investors continued to favor large, primarily coastal, markets which are considered as more stable. Sales in seven primary metro areas (New York, Los Angeles, Chicago, Washington, D.C., Houston, San Francisco, and Boston) totaled more than $ billion in, or about % of the national volume. Last year sales volumes in each of these areas were significantly above levels, which was not the case in most secondary and tertiary markets. Not surprisingly, all qualities of apartment properties in primary markets were trading at an average.% cap rate or a % premium over secondary markets and a % premium over tertiary markets, based on year-end transactions. It is important to recognize that this focus on the primary markets is not a function of their superior real estate fundamentals and investment performance, but rather perceived advantages associated with liquidity or supply constraints. Some, but not all, primary markets do indeed have a track record of higher occupancy and rent growth or are expected to show it going forward. Some have also surpassed their pre-downturn revenue QUARTERLY SALES VOLUME, $BIL Garden-Style Mid/High-Rise Source: Real Capital Analytics.

8 OVERVIEW levels and are well ahead of the nation in this cycle. That said, large markets do not always outperform (both individually and as a group) over typical investment horizons, and when they do, it is usually by a relatively narrow margin. Focus on large coastal markets has been part of core investment strategies for a while and is not just a result of today s risk aversion stemming from economic uncertainty. Most primary markets have done well and should continue to do well over the long run, which helps explain why these assets demand such high prices, aside from factors such as asset size, quality, age, and operating efficiencies. Return advantages (even on a risk-adjusted basis) that small markets offer over the next five years may simply not look attractive enough to core investors as a compensation for the higher risk they associate with them. If that is the case, it would be a good time for new strategies that would expand investment horizons. One could argue that the risk aversion that impacted pricing during the recession is not permanent and should begin to dissipate as real estate and capital market fundamentals improve. With capital targets moving to secondary and tertiary markets, there are indications that this shift is already starting to take place. Nevertheless, the appetite to invest in secondary and tertiary markets will more likely come from private equity investors rather than institutional investors. TRANSACTION-BASED CAP RATE, % 9 Current pricing reflects this strong investor sentiment toward apartments: it is the only sector where the national average transactionbased cap rate is back to the levels seen before the financial crisis in. Apartments All Property Types Source: Real Capital Analytics. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

9 Debt & Equity Finance Market Trends saw a continuation of the strong recovery in multi-housing fundamentals, which in turn made apartments the preferred product type for lenders. This resulted in a more than ample supply of debt capital and historically low mortgage rates. Continued lack of supply, shifting demographics and the overall shift from an ownership to rental mentality were still positively impacting multifamily trends. Relatively strong employment figures in the key - to -year-old rental pool also contributed to record years for many lenders. The multi-housing capital markets were flush with many different sources of capital: Government Sponsored Enterprises (GSEs), life insurance companies, pension funds, banks, CMBS lenders, bridge lenders, and mezzanine players. The GSEs (Fannie Mae and Freddie Mac), together with HUD FHA, closed more than $ billion in loans during. Life insurance companies were extremely competitive in the market. Although CMBS lenders were active in the beginning half of the year, their volume was low compared to the height of the market. Banks and on-book bridge lenders were active for shorter-term capital requirements including new construction and repositioning plays. For higher leverage requirements, mezzanine lenders were active filling the capital stack. There was also ample joint venture equity available for new construction, value-add and core investments. Multi-housing trends were marked by compressing cap rates, increasing trade volume, and rising rents. Capital was in high demand not only for refinancing purposes, but also for new development, repositioning and acquisitions. These trends were nationally represented, rather than limited to primary markets, and capital sources were available to greet the opportunities. Given the low Treasury rates coupled with strong competition, interest rates were kept low throughout the year. The GSEs continued to be a reliable and highly attractive option for multifamily borrowers looking to acquire or refinance assets. With huge volumes and extremely low delinquencies, GSEs were able to experience one of their best years ever. Fannie Mae was the largest agency lender and closed $ billion of loans in. Freddie Mac was close behind, closing just over $ billion. These two lenders were able to offer borrowers shortterm and long-term loans with a variety of fixed and floating options. The following terms were prevalent amongst GSEs, with some variations due to differences in asset quality, location and local market conditions: Ideal loan size of $ million and greater (extra fee for smaller loans) Maximum leverage of % for acquisitions and % for refinances -, -, and -year terms -year amortization More flexibility on interest-only options. For example, on a -year loan, borrowers typically received two or three years interest only. A -year deal obtained three to five years interest only, depending on the metrics of the deal and the overall leverage. On the - and -year deals, lower leverage loans with strong sponsorship may have been structured as full-term interest-only for high quality, well located assets. Rates ranged from.% on -year deals to.% on -year deals Subject to.x DSCR in most markets, with more troubled markets underwritten to.x DSCR or higher. Fannie Mae also had underwriting floors based on internal credit requirements. Both Fannie Mae and Freddie Mac offered early rate lock options to better compete with life companies that locked rate at application.

10 OVERVIEW As the GSEs continue to work through their conservatorship issues, they are forced to do more with less. As they search for ways to be more efficient, there will be increasing emphasis on enhancing the process for repeat borrowers, streamlining Early Rate Locks, and simplifying the process wherever possible. HUD FHA closed $ billion during the year. For borrowers that were looking for maximum proceeds on market rate acquisition and refinance transactions, the HUD FHA product provided up to.% LTV with up to years of amortization, and was sized to a.x DSCR. Due to the longer processing time for HUD loans, this product type is more suitable for refinancing rather than for funding acquisitions. HUD FHA also remains an active lender for new construction and substantial rehabilitation loans that offer terms up to years. Many life insurance companies and pension funds were able to meet and exceed their allocations in, as demand for their products remained strong. In the multifamily space specifically, life companies were able to win deals by offering creative structures including flexible prepayment options, full-term or partial interest only periods, staged funding or holdbacks, forward commitments, and customized loan agreements. Life company underwriting was, for the most part, less rigid than agency underwriting, which worked well for new construction and lease-up deals. Life company advantages in the market also included traditional efficiencies of balance sheet lending, such as borrower friendly rate lock processes and flexibility. Whereas the agencies were willing to increase leverage to get more yield, life companies tended to be more conservative on leverage, but more competitive on pricing and structure. The following trends were seen among life companies: Ideal loan size of $ million and greater, but stretched for smaller deals that were well located, as well as high quality assets with strong sponsorship and potential for more business Leverage ranged from % up to % -, - and -year terms were normal and many lenders sought terms longer than years Amortization between and years Interest only options available, especially on lower levered loans Given the accommodative government monetary policy, along with the expectation of continued strong performance of multi-housing and the number of capital providers competing in this space, we are likely to see very attractive financing options in. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

11 Pricing was typically mid-to-high % for low levered, shorter-term deals and up to % for higher levered, longer-term deals Some life companies and pension funds offered mezzanine loans with prices in the high single digits or low double digit return hurdles to boost overall returns and bridge the gap on construction loans from the previous cycle CMBS. was active in the first half of the year, offering borrowers aggressive leverage, pricing and structure. In July, however, Standard & Poor s pulled its rating of a new CMBS issuance by Goldman Sachs and Citigroup. This move caused extreme volatility and halted originations for most of the second half of. Despite this, CMBS lenders closed $ billion during the year, which was below historical highs, but increased from the recession years. CMBS lenders were focused on high quality assets in secondary markets, as these were priced favorably compared to primary markets. The following trends were seen in CMBS lending: Loan size greater than $ million Leverage typically capped at % Most loans had -year terms, but some lenders offered - and -year terms as well -year amortization Not as much flexibility as with life companies or GSEs Bridge loans were in ample supply during. These loans were typically secured by multifamily assets that were non-stabilized, partially-stabilized, or had other value-add components. The continued low LIBOR rates resulted in very favorable floating rate bridge debt, and purchasers of value-add opportunities were able to capitalize on this. In general, bridge loans had the following characteristics: Non-recourse for higher quality assets that were non-stabilized Partial to full recourse for lower quality assets that required substantial rehabilitation % to % of total capital stack (including rehabilitation work and closing costs) with most minimum loan amounts of $ million - to -month term with extension options Typically interest only, fixed or floating rate Rates varied between.% and.% (depending on the complexity or challenges associated with the deal) In addition to the debt players, there were also a number of equally interested joint venture equity partners that came into the multi-housing market during. Equity structures included joint ventures, preferred equity and takeover equity. Equity raises coupled with debt issuances were utilized for large, high-rise multifamily construction, particularly for core quality urban infill locations. Equity was in high demand, as many operators clamored to start construction before competitors broke ground. However, finding equity for many suburban development deals continues to be a challenge. Given the accommodative government monetary policy, along with the expectation of continued strong performance of multi-housing and the number of capital providers competing in this space, we are likely to see very attractive financing options in, particularly for institutional quality assets. The one significant cloud on the horizon is the future construct of Fannie Mae and Freddie Mac. However, the collective thinking is that no definitive steps relative to their future will be taken until or. 9

12 OVERVIEW Senior Housing Outlook In spite of demographic trends continuing to show tremendous growth in all segments of the + age group, recovery within the senior housing sector continues only modestly. Development of new product remains constrained and price sensitivity continues to play a major role in occupancy growth. Unlike recent previous years, current trends within the sector are positive, albeit marginally. Transactional activity appears to have peaked in with fourth quarter activity showing signs of a pause and more conservative pricing. While demand for acquisitions continues to be high, aggressive pricing pressure offered on portfolio transactions by major REITs appears to have subsided, possibly creating a pricing disconnect between buyers and sellers. Operational fundamentals continue to remain steady with no significant cost reduction. The CMS cuts announced last year, which took effect in the fourth quarter, have severely impacted valuations of senior properties with significant Medicaid and Medicare revenue components. Further, these cuts along with the fact that buyers and sellers cannot agree on what actual and budgeted numbers should be have had an adverse impact on transactional flow for these properties. As modest increases in employment and wages continue, so do the trends within the sector. And while entrance fee communities continue to be adversely impacted by the stagnant single-family housing market, rental independent living has increased in demand over previous years. Sector Trends Mirroring National Trends Occupancies across the continuum of senior housing (with the exception of entrance fee communities) have been improving modestly on a year-over-year basis. Economists agree that the national economy has entered into a slow growth period and the sector has shown evidence of this trend. Unlike other real estate asset classes, the senior sector did not witness a fall out in fundamentals or any noticeable nationwide free fall in occupancy. Fortunately, while occupancies have not risen dramatically, they are in fact rising. According to the National Investment Center for the Senior Housing and Care Industry (NIC), occupancy in independent living and assisted living increased by approximately 9 basis points to.%. Nursing home facilities remained relatively steady at.% from the fourth quarter of to the fourth quarter of. Third quarter occupancies were almost identical in independent and assisted living at.% and only.% higher in skilled nursing averaging.%. The decline in occupancies throughout the first decade of the new century appears to have been replaced by a trend of modest growth beginning in. While the previous three years have brought controversy with respect to both average occupancies and whether previous years oscillations were the result of a nonstabilized marketplace, the trend of positive occupancy now appears in-step with other growth characteristics of broader consumer trends. This in turn suggests that the senior housing sector, regardless of demographic growth, will trend more like the broader economy and market-rate multi-housing. As with the multi-housing sector, the averages offered herein may not be representative of specific metropolitan markets. Certain metro areas may have experienced far better or worse occupancy averages. Year-Over-Year Rental Rates Stagnant With occupancy increasing year-over-year, operators have been able to raise rates on a per unit basis. This increase, however, is quite modest and remains impacted (in the private pay rental model) by discounts offered at the point of sale. As reported by NIC, fourth quarter rental rates for independent living averaged approximately $,, compared to assistedliving communities (including memory care) at $,, and nursing care facilities at $,99. In the fourth quarter of, average rental rates increased to.% for independent living,.% for assisted living, and.% for nursing care communities. These averages include base rents and monthly care fees. They do not include ancillary or à-la-carte care fees, move-in fees, or community fees and do not factor in the negative impact of concessions. While once again modest, the year-over-year increases are significant, as previous years have not shown definitive trends. As information regarding community-based concessions is typically very closely held by the operators, it is the general consensus of the industry that large concessions to entice prospects to move in have played a significant role in the velocity of all rental rate increases. According to Real Capital Analytics, approximately $. billion in senior housing was acquired in with another $. billion in skilled nursing, far eclipsing the successes of. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

13 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 % % % % % % Age + Age + Total U.S. Construction Activity Remains Constrained Construction activity remains severely impacted by a lack of construction financing available in the marketplace, as with most real estate sectors. Construction activity in the fourth quarter per NIC MAP slowed to.% of existing supply, down from an estimated.% in the same period. The inventory growth for senior housing product slowed in the fourth quarter to.%, down again from last year s growth of.%, which was the lowest level over the seven years prior. While demographics continue as expected for the next years to favor product demand within the senior housing sector, the lack of willingness to originate construction loans by the majority of local and regional banks and the lack of available agency-sponsored construction debt programs (with the exception of HUD), construction will continue with anemic pace until lending institutions re-enter the construction debt marketplace on a programmatic basis. Agency and Balance Sheet Lenders Continue to Provide Financing showed dramatic year-over-year growth in lending activity and diversity from multiple lending sources. The re-emergence of balance sheet lenders to the sector, coupled with renewed activity in the sale of mortgage-backed instruments in the secondary market in, provided the senior housing sector with multiple solution scenarios for mortgage financing. Bridge loans and acquisition financing for non-stabilized properties began emerging from life companies and other traditional balance sheet lenders in and continued through. Further, public companies, most notably REITs, all had tremendous success accessing unsecured debt and equity through the Initial Public Offering process. Fannie Mae, Freddie Mac and HUD all remain committed to the senior housing space. Fannie Mae and Freddie Mac each originated approximately $ billion in new financings, and HUD successfully originated well over $ billion. Borrower interest rates remained extremely low by historical standards based on both low benchmarks (US Treasuries and Freddie Mac reference bills) as well as investor, guaranty and servicing spreads. Several large refinancings and assumptions were completed, adding to the total volume of each of the agencies. The continued pace of the transactional marketplace added to the strength of the financing marketplace as most, if not all, acquisition activity resulted in market consolidation. This assumption activity is not included in new origination totals. Interestingly, as the years of represent years with significant volumes of maturing loans

14 OVERVIEW across all sectors, many borrowers took advantage of low interest rates to refinance existing loans, rather than risk higher interest. Thus, the origination of new loans by traditional agency lenders outpaced the totals of and this trend appears to be continuing. Transaction Volume Increases Dramatically The transactional marketplace began on pace to exceed the enormous year of. Portfolios previously announced were ultimately closed and new portfolio transactions were initiated. This activity continued until roughly mid-year, when the announcement of new activity tailed off rather quickly. Fourth quarter activity was the lowest of the year. According to Real Capital Analytics, approximately $. billion in senior housing was acquired in with another $. billion in skilled nursing, far eclipsing the successes of. As discussed previously, the economics related to this product type, while improved on a year-over-year basis, have shown only marginal improvement. It is therefore surmised that this robust transactional volume (due in large degree to the continued appetite of the REITs) is due to the risk-adjusted returns for this product type and the relative cost of both debt and equity within the sector. Large portfolios such as Benchmark Senior Living ($ million) and Chelsea Senior Living ($ million) added to the list of portfolios (Atria/ Lazard, Merrill Gardens, etc.) that were acquired in. While the year-over-year volume between and will not compare to /, the dollar volume will. It is expected that dollar volume for transactions will eclipse by over $ billion. This volume represents close to % of the existing housing stock within the sector. While activity is not projected to approach the level set in, REIT acquisition interest will continue, and there will be an increase in smaller transaction activity related to both pending debt maturities and pent up acquisition demand by private equity. For both REIT and non-reit related transactions, cap rates for appear to be slightly more conservative than those reported in. REIT and portfolio related transaction cap rates ranged from.% to.%; non-reit, non-portfolio transaction cap rates ranged from.% to.%. The low end of these ranges suggests continued demand for acquisitions and relatively low cost of capital (both debt and equity), as well as stabilized operations and occupancies. Skilled nursing facility transactions continue to experience the highest cap rates, as the relative risk of operations, expense reimbursement and care are all significantly higher than other levels of care. Assisted living and memory care communities continue to demand more aggressive cap rates relative to independent living. Outlook The outlook for is for continued stabilized operations and modest growth in revenue and expenses. This assumption remains valid barring any setback to the ongoing improvement in the national economy at the consumer level. The growth projections for the development of new product are extremely low, which will result in a relatively stagnant supply of new product and potentially impact occupancy positively. Conversion from lower levels of care to higher levels in existing facilities will continue as the aging in place model continues to create more demand for assisted living and memory care. Acquisition activity on the part of REITs within the senior housing space appears to have leveled off and may diminish. This is most likely due to the lack of available product that can meet REIT acquisition criteria (physical condition, appropriate return, lease or taxable lease structure, credit of tenant, condition of cash flows, etc.). Acquisition activity of operators and private equity appears robust and will continue. Given the current economic climate and the operational results generated, the senior housing industry will continue to generate further organic operational efficiencies. Given the rapid consolidation of real estate generated by REIT acquisitions, CBRE believes larger operational platforms and experienced private equity sources will move to consolidate existing single assets and small portfolios through acquisition. The retail fundamentals of the industry continue to demonstrate the necessity of expansion of capacity; however, until debt capital returns to construction and development, the sector will still suffer continued shortfalls in new product. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

15 National student housing pricing trends have increased % over and have surpassed their peak. Student Housing Outlook Enrollment Growth With enrollment growth expected to continue trending upward, reaching 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 U.S. 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 have increased % over and have surpassed their peak. Distressed asset sales, continuing to decrease as a percentage of total asset transactions, comprised approximately % of total consideration, trading at an average of $, per bed. Non-distressed sales transacted at $, per bed. Each year, per bed pricing is converging with pre-recessionary levels inclusive of a higher level of distressed sales, a sign of continued confidence in the sector and continued interest from non-student investors in the resilient student housing property sector. CBRE saw an estimated year-over-year revenue increase of.% for the / school year, despite more product delivery than the last two years. Although student housing metrics have experienced volatility in the face of tumultuous economic times, the 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 9,, Total Enrollment (in thousands),,,,,,, Total Enrollment SOURCE: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System, Fall Enrollment Survey (IPEDS- EF:9 99), and Spring through Spring ; and Enrollment in Degree-Granting Institutions Model, 9. (This table was prepared February.)

16 9 9.%.%.%.%.% OVERVIEW PRICING TRENDS PER BED $, $, $, $, $ Source: CBRE $, $, TRANSACTION VOLUME 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 #of Transactions #of Properties #of Portfolios $Volume (Millions) Source: CBRE $, Pricing Trends Per Bed $, $, STUDENT HOUSING VS MULTI-HOUSING CAP RATES $, $, $,9 $, Transaction Volume Deal volume in has outperformed the student housing market with transaction volume up approximately % over consideration, and total transactions up.%. transaction volume was the largest since with transactions the highest since outperforming by properties. transactions yielded increased variability across asset quality and geographic areas, including secondary market activity. However, the fourth quarter of saw an elevated level of REIT buyers and developer sellers. This variability in property trades is a good sign of investor confidence in the asset class and a return to a more diverse investor pool Cap Rates Student housing transactions have traded, on average, at a.% cap rate, with core transactions trading in the mid % range. Yearover-year cap rates continue to decrease from of the high of.9% in the first quarter of. Low cap rates are a result of increased investor demand, lender/servicer deals with significant upside potential, institutional investor demand for student housing, and the near historically low interest rate environment. Cap rates are forecasted to remain flat through, as current market fundamentals are not expected to change. A greater degree of variability is expected in student housing cap rates due to the smaller universe of trades in relation to conventional multi-housing. Interest Rates Recent statements made by the Chairman of the Federal Reserve, Ben Bernanke, indicate the Fed s intention to keep benchmark interest rates low through to combat chronically high U.S. unemployment. In September, Bernanke announced Operation Twist, a bond buying program not intended to increase the money supply, but to sell some of the Fed s considerable holdings of short-term treasury securities. The proceeds from which will be used to buy long-term instruments, effectively flattening the yield curve and driving down long-term borrow rates. Operation Twist, initiated in October of, will end in June and will likely drive down rates on all debt instruments based on Year Treasuries, such as many student housing mortgages. Cheaper capital costs and maturing debt will likely fuel acquisition markets throughout, with many seeking to capitalize on historically low interest rates. Source: CBRE and RCA CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

17 Fundamentals have remained strong and allowed most student housing owners and operators to report strong leasing activity and rental rate increases. Seller Profile REITs, private capital, and developers all played a significant role in property dispositions in with each contributing %, %, and % respectively to aggregate deal volume. Year End has seen approximately % of total consideration and % of transactions from lender/servicers, a % decrease over where lender/servicer deals comprised % of transactions. In the first part of, it is expected that transaction volume will be driven by pending debt maturities. Buyer Profile Transactions in the first half of, similar to the capital profile, were dominated by private capital groups. REITs gained traction in the second half of by deploying capital from early sales, resulting in this group garnering % of the total transactions for the year, a stark contrast to volume of only %. Overall, signified that REITs have re-entered the acquisition market full force. Based on student housing allocations for institutions and funds, CBRE anticipates that private capital and REITs will become more active in the acquisition market. Capital Markets The student housing sector has performed better than all other commercial real estate sectors during the recent economic downturn. Fundamentals have remained strong and allowed most student housing owners and operators to report strong leasing activity and rental rate increases. The sector has been able to avoid the extreme impact of the credit crunch felt by the commercial sector because investors have been able to turn to Fannie Mae and Freddie Mac to finance their acquisitions and re-finance their existing portfolios. Since the crash of the CMBS market, the GSEs have dominated the market for providing nonrecourse, longer-term debt to student housing owners. Their ability to provide low-cost financing on up to % of property value, allowed them to capture the market when most commercial lenders limited their loans to % or % of value and included onerous terms to the borrower. However, the availability of attractive long-term debt capital has grown for the student housing market throughout to. Although Freddie Mac and Fannie Mae are still providing the majority of debt to the student housing sector, traditional commercial real estate lenders are beginning to show more interest. The CMBS market saw a resurgence in the first half of until some pools saw a correction in pricing. While it is still a work in progress, the securitized market may be able to start providing competitive debt sooner than expected. Life insurance companies are hungry to put money into the market and eager to diversify their portfolio with a product type that has performed so well throughout the downturn. While these lenders are still more selective about product age and distance to the respective university, they are able to compete with GSE pricing and provide debt on up to % of property value. SELLER AND BUYER PROFILE YTD Seller Profile Buyer Profile % % % 9% % % % % % % % % Developer University Private Capital Non Profit Lender Services Operator/Fund REIT Institutional Source: CBRE Student Housing Group

18 OVERVIEW Manufactured Housing Outlook As today s commercial real estate investor scrambles to find recession-proof investments and value, a new attraction to manufactured housing is emerging. Over the past two decades, this niche has become recognized as one of the best performing asset types, due to a passive nature and great cash flow. Although the industry has lost communities to infill development, there has been little to no new construction of manufactured home communities (MHCs) over the past years. The well-maintained communities will continue to provide an affordable lifestyle for their residents. Today, manufactured homes are made better and consumers are in real need of affordable housing alternatives. While most investors expect Class A communities to sell for basis points higher than Class A apartments, most Class A manufactured home communities actually trade on par, or within basis points. The combination of limited supply, high demand, and Fannie Mae financing for well-managed and highly 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.%. There are approximately, investment-grade (+ spaces) manufactured home communities out of the approximately, communities in the United States. Ownership of these investment-grade communities has become increasingly consolidated, with three public REITs making up the largest consolidators in the U.S. However, since the industry still remains quite fragmented, there are great opportunities for investors seeking real estate segments that are not dominated by institutional buyers. In addition, more opportunities often surface when owners of large portfolios dispose of assets that do not fit their strategic objectives. A recent survey conducted by JLT Associates indicates that the national occupancy rate stands at 9% for + communities and % for all-ages communities. Average adjusted rents for both categories have seen increases from to, with + communities up.% to $ per month and all-ages communities up.% to $ per month. Several factors have changed the way owners must do business, which has resulted in increasing opportunities. In the 9s and 99s, it was common for community owners to have dealers pay them to bring homes into their community. However, this changed with the demise of the chattel lending market in the early s. It has become more challenging to fill communities. Today community owners are purchasing homes to lease or lease-to-own the homes in order to occupy a vacant lot. This requires significant capital and has put tremendous pressure on the balance sheet of many operators. Many owner/operators have exhausted operating capital or overleveraged after purchasing and rehabilitating homes. Now they must consider taking on joint venture partnerships or selling assets due to the lack of financing available to maintain and keep up occupancy in their community. Others have extended their loans or have simply handed back the keys to banks or special servicers due to loan expirations, low debt coverage ratios, or lack of new financing. Third-party financing for manufactured housing communities has traditionally been obtained from the following sources: Fannie Mae, CMBS, local banks, life companies and owner financing. CMBS and lending from local banks has filled the void for the Class B and C manufactured home community properties. CMBS loans currently make up more than active loans, representing several thousand manufactured housing communities. Conduit lenders have a strong appetite for MHCs because they have difficulty competing with Fannie Mae on apartment loans. Seeing that MHCs qualify as multifamily properties, they provide much needed diversification in conduit loan pools. Many experts expect manufactured housing to rise to the top as a result of the recent financial crises. Feeling the adverse effects of the economy, many people continue to seek new housing alternatives and a second chance at homeownership. This trend will allow the existing communities that have experienced declining occupancy to achieve much higher occupancy and NOI growth in the coming years. YEAR-TO-DATE REGIONAL SHIPMENT Market Share Destination Pending.% Pacific.% Mountain.9% West South Central.% New England.% Middle Atlantic.9% East North Central.% East South Central.% West North Central.9% South Atlantic.% TOTAL TOTAL RANK STATE MH UNITS FLORIDA,. TEXAS,. NORTH CAROLINA,9. CALIFORNIA,. GEORGIA 9,. SOUTH CAROLINA,99. ALABAMA,.9 ARIZONA,. 9 MICHIGAN,. TENNESSEE,. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

19 Low Income Housing Tax Credit Outlook During, CBRE s National Tax Credit Advisory Group observed several trends pointing to a dramatically improved affordable housing market. and were big comeback years for the low-income housing tax credit (LIHTC) industry, as evidenced by the increased volumes from the nation s top affordable housing lenders and equity firms. Construction debt volumes soared and continued low-interest rates helped fuel the affordable housing market. As a result, owners were assisted with their preservation initiatives and developers were provided with the construction loans needed to complete new affordable multifamily developments across major and tertiary markets nationwide. Tax credit syndicators continue to evaluate and identify various exit strategies with investors much earlier than in the past. Although many syndicators exited the business in and, and the warehousing of tax credit investments remained relatively low, the entry of additional investors during bolstered the LIHTC market and is expected to continue during. The current market to sell tax credits is improving, with several firms becoming active in seeking new LIHTC investments. Tax credit pricing is in the $. to $.9 per credit range with all-in yields around the % to 9% range. A project s ability to attract soft debt from local and state sources is critical in forming the capital structure for each deal. Due to financial constraints with many state budgets, access to soft funds will be increasingly difficult. As a result, the competition for available funds and related LIHTC awards will be fierce. Tax credit buyers prefer new construction over acquisition rehab properties due to potential development of deferred maintenance issues during the hold period. The strongest markets for LIHTC investment continue to be California and major metropolitan areas in the Northeast. California is currently restructuring its ability to provide soft debt to the LIHTC developments seeing that community reinvestment organizations were eliminated from budgetary constraints at the state level. Cities are also becoming more involved and finding ways to assist developers with LIHTC developments. There is a significant need for LIHTC investment to preserve and increase affordable apartments for a growing tenant base in California and major areas in the Northeast. However, the number of acceptable submarkets within these areas has tightened, as investors remain cautious in the face of continued and projected job losses. Exit strategies for Year tax credit properties and the sale of general partnership interests during the compliance period appear to be gaining momentum. As the LIHTC program continues to mature, more properties will reach the end of the compliance period each year. Current owners of Year partnerships will have to make a decision to sell, refinance or re-syndicate, as tax benefits and compliance periods expire. A growing number of LIHTC developers are looking at disposition options, including the opportunity to recycle expiring LIHTC properties. These properties will continue to have extended-use provisions that place various rental restrictions on new owners and typically result in slightly higher capitalization rates than unrestricted properties. General partnership sales are gaining momentum and acceptance in the marketplace, and they typically sell based on an internal rate of return (IRR) in the low-to-mid teens. According to Affordable Housing Finance, Fannie Mae had a big year for affordable housing production in. The agency rejuvenated its offerings and re-engaged in the market. They are on track to record $. billion in volume for the year, allocated among preservation, New Issue Bond Program (NIBP), and low-income housing tax credit (LIHTC) deals. By comparison, Freddie Mac is estimated to produce $. billion in affordable loan production. In addition, several commercial banks have reentered the LIHTC market, which will help to create a competitive balance for debt and equity products. The LIHTC market fundamentals have rebounded from the recent economic downturn and remain strong at the property level. The investor market has proven to be very resilient as we return to a more stable economic period. Vacancy rates remain low and rental rates continue to rise. While the next year will likely remain challenging, the long-term outlook for the LIHTC market will continue to provide a stable return for owners and operators.

20 INTERNATIONAL HIGHLIGHT CANADA The Canadian multi-housing market is appealing to more prospective tenants and investors than at any time in recent memory. The market tightened in and there will be support for rental housing demand in the year ahead despite the fact that the Canadian economic outlook is more complicated than it was a year ago. Investors looking for stable income producing investments continue to seek out multi-housing assets across the country; however, owners remain hesitant to sell. The search for yield may spur construction of purpose-built rental housing, but this has yet to materialize in any significant way. While there is no such thing as a sure bet, the Canadian multi-housing market looks to be the next best thing. The national vacancy rate fell basis points (bps) to.% in October, which is the lowest vacancy rate since. Canadian economic growth was relatively robust for much of the year despite global economic uncertainty. Rising employment and consumer confidence coaxed prospective tenants back into the rental housing market. Home sales moderated during the second half of the year which also supported rental demand. There were few areas of the country in which multi-housing fundamentals did not improve in. Economic growth has tilted toward resource rich provinces in Western Canada, which has resulted in the migration of Canadians from other provinces and a larger proportion of foreign immigrants as well. As a result, the vacancy rate in Calgary and Edmonton has declined steeply, falling bps to.9% and 9 bps to.%, respectively, since. These were the hardest hit markets during the recession and the vacancy rate rose to.% in Calgary and.% in Edmonton, a -year and five-year high, respectively. Both Calgary and Edmonton continue to have vacancy above the national average, but the economic outlook and demographic trends will support multi-housing demand in these markets over the long-term. Elsewhere in Western Canada, Winnipeg has one of the lowest vacancy rates in North America at.% and has been bolstered by a stable economy and increasing immigration. Demand for rental CANADIAN MULTI-HOUSING CAP RATE 9% % Cap Rate (%) % % % Multi-Res - B Source: CBRE Ltd. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

21 housing has rebounded in Vancouver after some post-olympic weakness and the vacancy rate is now a very low.%. While economic growth is less robust in Eastern Canada, the demand for rental housing is no less impressive. The lack of new purpose-built rental stock and nearly 9, immigrants per year has helped the vacancy rate fall to.% in Toronto, the lowest level in years. Increasing post-secondary enrollment and improving youth employment prospects have boosted demand in London and Waterloo where the vacancy rate is.% and.%, respectively. Demand has been stable in Ottawa, Montreal, and Halifax, but vacancy fell more moderately in these markets than in other areas of the country in. The overall average rental rate grew.% (y/y) in, which is the fastest rate of rent growth in four years. Rent growth is still a bit soft given the fact that rents grew.% on average annually over the last ten years. The reason for slow rent growth is twofold: rent control held increases to as little as.% (y/y) in Ontario, while decreased economic growth during the fourth quarter caused the unemployment rate to rise to.% in December. Rent growth was highest in Halifax, Winnipeg and Vancouver at.%,.% and.%, respectively. In terms of unit type, bachelor units recorded average rent increases of.9% (y/y) as people sought to enter the market at the lowest cost. The average rental rate for two-bedroom units, a commonly used benchmark, was $9.9 per month, up.% (y/y), which is in line with the.% average rent growth for two-bedroom units over the past ten years. Institutional and foreign investors would like to break into the Canadian multi-housing market in a bigger way, but the lack of available product and dominance of private buyers has made this difficult. There were multihousing transactions in worth a total $. billion. The number of transactions was down from in ; however, the volume was up.% (y/y) due to large transactions including the, unit Cherryhill Village in London, Ontario which sold for $ million. Private buyers dominated the market and accounted for.% of multi-housing investment volume, which is down from.% last year. The drop was due to increased demand from REITs and REOCs which accounted for 9.% of volume, up from.% 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 cheap financing despite talk of a cap. Loan-to-Value ratios up to.% are available to purchase product and CMHC lending rates consistently beat those offered by conventional lenders. The overall national vacancy rate has not fallen below.% in a decade, but is likely to do so in. The biggest challenge to the Canadian multihousing market in the last decade stemmed from a rush to homeownership, not economic difficulties. Record home prices across the country and dramatic increases in major markets have priced many people out of the housing market. The potential for moderate economic growth and higher interest rates are unlikely to result in a resurgence of home sales. Demand is expected to be stable, while the size of the rental universe will likely decrease in the shortterm; however, investors trying to break into the market could pursue forward sales and bring much needed product to the market in the years ahead. These factors bode well for rental rate growth and the red hot appeal of the Canadian multi-housing market is unlikely to be dampened in. MULTI-HOUSING SALES VOLUME Sales Volume ($ Billions) $ $ $ $ $ $ Number of Deals Sales Volume ( L ) Number of Deals ( R ) Source: CBRE Ltd. and RealNet Canada TORONTO AND NATIONAL IMMIGRATION Net International Immigration Resale Home Price ($),,,, COOLING HOUSING MARKET BOOSTS MULTI-HOUSING DEMAND $, $, $, $, $, $, $, $,,, 99 Toronto Canada 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 % % % % % % % % Sales to Listings Ratio $ Average Resale Home Price ( L ) Sales to Listings Ratio ( R ) Source: Canadian Real Estate Association % 9

22 INTERNATIONAL HIGHLIGHT UNITED KINGDOM UK PRIVATE RENTAL SECTOR GROWING The Private Rented Sector in the UK has changed dramatically over the last years. The supply of affordable housing to buy has failed to meet growing demand; the result is a rapidly growing private rented sector. Since the 9 s the ultimate aim of housing policy in the UK has been to create a property owning democracy. Successive governments have sought to achieve this by encouraging mortgage lending and introducing policies like Right-to-Buy. In, owner occupation was at its peak and accounted for over % of the English housing stock. Since then it has declined; reflecting both a decade of rapidly rising house prices and the subsequent market collapse in /. It is now at %, its lowest since 9. With social housing struggling to meet demand, it has increasingly fallen to the private rented sector to meet housing needs. There is an absolute shortage of places for people to live in the UK, whether as owners or renters. This primarily reflects a complete failure to build enough homes; the number of new homes built last year was the lowest level since records began. Even pre-recession house-building was woefully below target; there is a cumulative shortfall of house building versus target over the last five years of over, homes. This is the elementary force driving house price inflation and rental growth. Current demand is especially high in the private rented sector, and rents have been increasing significantly year by year. This partly reflects underlying market conditions whereby potential first-time buyers, who have been priced out of owner occupation, are turning to the rental market. Conservatively, the private rental sector is worth close to billion, more than the entire UK commercial property sector. Despite this, less than % of private rented stock is held by institutions. The historic reasons for this include European-style rent controls up until 99, combined with a market that has always favored owner occupation. This limited the scope for yield driven residential investment. However, there is no question that institutions like the characteristics of residential investment. It is more stable, and less volatile than commercial assets. It is more aligned to pension fund liabilities, as rental income is closely correlated with wage growth. For pension funds, wage growth is the key determinant of defined-pension payout liability. Therefore, investment in residential is a very good way to offset this cost. Moreover residential returns have outstripped commercial on various yearly measures. For example, according to the Investment Property Database (IPD) residential returns are favorable compared with other assets. Average returns over the last ten years were.%, which compare with Commercial property (.%), FTSE All-Share Index (.%) and FTSE - Yr Gilts (.%). In addition, the returns from UK residential property are less risky, as measured by the volatility of returns over time. UK residential has outperformed commercial property and equities both in terms of volatility and total return. Gilts (British government securities) are less risky by their very nature (government backed), but this status is less secure than it once was in the wake of global sovereign debt downgrades. This has driven an increasing investor appetite. According to CBRE s annual investment market intentions survey, the biggest shift by investors has been towards the residential sector. It is intriguing why institutions continued to be so under-invested in the residential sector (albeit with a recent upsurge in interest in both investment and development entry routes), but it in part reflects CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

23 seeking joint ventures or refinancing options. This is an attractive model that institutions are taking interest in. In fact, Aviva launched an affordable housing fund that can take advantage of long secure leases with RPI-linked income return. Over the last year there have been two new significant entrants into the UK residential investment market. The first is Akelius, a billion residential investment charitable trust. CBRE has been retained by Akelius to build a billion portfolio within the UK, and in the last month helped Akelius invest million. Akelius entered the UK back in the summer of, attracted by the strength of the UK rental market. It believes there will be an increasing demand for rental accommodation that is owned and managed by an experienced landlord. Through effective management, and by refurbishing and renovating their properties, Akelius wants to set a new standard for private rented sector accommodation in the UK. The initial geographic focus is Greater London and nearby suburbs with good transport connections. The other noticeable new entrant is that of Ivanhoe, the Canadian pension fund, who has so far committed million to assist London based Residential Land in the building of a central London residential portfolio. a lack of suitable stock. Typically institutions want to invest in the region of million in un-broken purpose built blocks. Critical mass generates procurement and operating cost savings. This might include lower costs associated with the maintenance or leasing of units, as this can be managed through an in-house team. It also provides the potential to offer a superior product for tenants, including function rooms, fitness facilities, swimming pools, etc. This helps with marketing and tenant retention, therefore reducing void periods and turnover. However, access to % private rental blocks of scale has not previously been possible in the UK and there are few assets of sufficient scale to attract institutional investors. The market is currently very fractured with stock scattered in existing residential buildings alongside owner occupied units or other rental stock owned and managed by a variety of agents. Institutions prefer to invest in entire buildings of rental units rather than such scattered stock. With such limited access within existing stock, institutions are looking to the development market to serve its needs. As a consequence, various institutions and funds have worked up models and ideas to launch investment vehicles. Aviva is still one of those funds, and they remain close to finalizing their own build to rent vehicle. Other models have emerged, particularly related to affordable and social housing provisions. Many of the registered providers of social housing are Given the interest in the residential sector, a number of domestic funds are launching, or have launched, mezzanine funds or composite debt/ mezzanine funds which take a loan position on a development or investment situation, rather than a direct ownership. The returns that can be derived from such lending, (and given the difficulties in the debt markets) is growing in attraction. In addition, opportunity funds have been quite active in the residential sector. They have been able to take advantage of the capital market difficulties facing developers and house builders. They have entered into joint ventures and in quite a few situations taken a corporate position by investing in a controlling ownership position. There seems little doubt that more investors will continue to get involved in the UK property market. Good growth has not only been seen within London and the Southeast UK, but increasingly other locations further afield. There are a number of major schemes that could well attract heavy equity investment against the background of being able to control the overall scheme, the management of the whole estate, and deliver a mixture of housing tenures (rental and owner occupation). There are some exciting advances in relation to this particularly in and around key sites in central London.

24 CASE STUDIES WEST HUBBARD Chicago, IL Transaction date: December Loan amount: $,, Number of units: The CBRE Chicago Debt and Equity Finance Group and the Chicago Multi-Housing Group teamed up to provide a joint execution in raising construction financing for the $,, development of West Hubbard in Chicago, Illinois. The proposed development of a story, LEED Silver Class A luxury apartment tower is located in River North, the most sought after apartment submarket in downtown Chicago. The - unit project will include an story parking garage with high end finishes and amenities. The assignment was initiated in the summer of amid a building boom in Chicago for downtown apartments. Six rental projects broke ground in, with another three to five scheduled for. The client s requirement for a long term joint venture equity partner with a minimal co-invest structure and need for non-recourse debt financing further complicated the assignment. By the end of the summer, the CBRE team had secured multiple viable offers from joint venture partners interested in moving the project forward. The strong investor interest in the site was a testament to the top tier quality of the development team and affirmation from the market that the location was among the best remaining development sites in the city. The CBRE Capital Markets team successfully secured an all-equity joint venture partner to eliminate the need for construction debt and provided a one stop execution for the client. The groundbreaking took place in the fourth quarter of to keep the project on schedule for a delivery and to better compete with additional new rental supply coming on line. CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

25 Pacific Northwest Transaction date: December Loan amount: $,, Number of units:, H9 PORTFOLIO The H9 Portfolio is made up of nine properties totaling, units located in the Seattle metropolitan area. The borrower, a joint venture between the Holland Partner Group and INVESCO, refinanced the properties as part of their plan to sell six of the properties this spring. Doing so allowed them to replace loans with maturity dates that were only years out with new -year fixed rate loans at approximately LTV. The interest rate was.% and included a spread premium for two years of interest-only payments and a significant discount of the pre-payment penalty. The loans were originated through CBRE s Freddie Mac Seller- Servicer direct lending program. CBRE worked closely with the borrower and Freddie Mac to re-underwrite the properties several times to take advantage of improving performance at the properties and achieve maximum loan proceeds.

26 CASE STUDIES EnV CBRE represented the Lynd Development and L&B Realty Advisors in the sale of EnV, a 9-unit luxury apartment building with approximately, square feet of retail/commercial space in the River North submarket of Chicago. Delivered in, EnV was commanding the highest effective rents per square foot in the downtown Chicago rental market. EnV defines urban core, as evidenced by its top-of-the-market unit finishes and its transit-oriented location at the corner of Kinzie and Wells, directly across from the Merchandise Mart. EnV won the Multifamily Executive development of the year award. CBRE s Retail Services Group leased approximately % of the space to a high-end restaurant, which will occupy floors and.. Lynd Development provided a three-year master lease for the remaining retail space on floors and. In December, Met Life purchased EnV on an all-cash basis. Chicago, IL Transaction date: December Acquisition price: $,, Number of units: 9 CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

27 Saratoga Springs, UT Transaction date: October Acquisition price: $,9, Number of units: ALDARA APARTMENT HOMES The CBRE Salt Lake City Debt & Equity Finance Group secured non-recourse construction financing for the Aldara Apartment Homes project, a -unit community located in Saratoga Springs, Utah. The loan was originated through CBRE HMF, Inc., CBRE s FHA/GNMA direct loan program. Saratoga Springs is a rapidly growing community in northern Utah County. Aldara Apartments will be the first multifamily rental property ever constructed in this community and the first such property built in Utah County since. The project will satisfy demand arising from new transportation links to Saratoga Springs and major new employment sources in the area. This apartment complex will create Class A apartment homes, in a mix of one-, two-, and three-bedroom layouts and will include a community building, fitness center, outdoor pool, and large open park area. The loan was funded through HUD s Section (d) () program, providing an interest-only construction period of months with a -year, fully amortizing permanent loan term. The Section (d)() program offers fixed-rate interest-only construction financing that converts to a -year term loan with -year amortization shortly after project completion. There are no NOI or occupancy hurdles to be met prior to conversion to the permanent loan. Also, this program offers higher loan-to-cost funding than traditional sources of construction financing. New York, NY Transaction date: December Loan amount: $,9, Number of units: TH STREET RESIDENCE The th Street Residence is the only dedicated assisted living facility in New York City specializing in memory care. The facility is a fully licensed, secured dementia care facility with apartments for 9 beds. The th Street Residence is located in the prestigious Upper East Side of Manhattan. CBRE, through its direct HUD FHA lender, CBRE HMF, Inc. (CBRE HMF), was able to assist the borrower in successfully financing the acquisition of The th Street Residence. The loan was funded through HUD FHA s Section /(f) program, providing a -year, fully amortizing loan at % loan-to-value. The financing includes approximately $. million for capital upgrades and life-safety improvements.

28 CASE STUDIES TUSCANY CBRE National Student Housing Group was engaged by the seller for the disposition of Tuscany, a bed core student housing asset adjacent to the University of Southern California, featuring a top of the market amenity package. Tuscany, built in, features, SF of prime retail space which was % leased upon sale. USC has an agreement with Tuscany, qualifying the property as University Sponsored housing, making this asset an attractive investment opportunity. Amenities include ground floor retail, spa area, fitness center, saunas, and a USC customer service center. The property was sold at a sub-% cap with the in-place debt assumed by the buyer. CBRE s National Student Housing platform engaged with the CBRE Southern California Multi-Housing team to coordinate the sale of the asset. Approximately groups registered to obtain the offering materials for the property, and the seller accepted a pre-emptive offer. This impressive sum is a testament to the quality of the property and the broad based marketing program executed by the national platform. Additionally, CBRE was able to quell fears of over-supply in the market, spurned by new development on and off campus. In fact, Tuscany transacted at a.% premium, on a per unit basis over a purpose built newly constructed asset in a similar location to campus. Los Angeles, CA Transaction date: February Acquisition price: $,, Mixed use: units, SF retail parking spaces CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT

29 Greater London, UK Transaction date: March Equity Investment:,, Number of units: TERRACE HILL PORTFOLIO CBRE are currently retained as sole agents by Akelius to source, analyse and purchase residential investments for them in Greater London and the South East of England. It currently owns approximately, residential properties in Sweden and Germany, a property portfolio worth over billion. Akelius entered the UK in the summer of, with a goal to build up a portfolio of, residential units in the next years, which depending on the average unit cost could mean spending in excess of billion. They will be targeting residential freehold investments let on Assured Shorthold Tenancy (AST) agreements. In the last six months, CBRE has successfully acquired nearly 9 million worth of income producing residential assets on behalf of Akelius, their UK portfolio now consisting of over units. The largest single transaction was the Terrace Hill, London and SE England Portfolio which was acquired for. million. The units are spread across sites and are predominantly let on AST agreements. The majority of the portfolio is made up of freehold blocks of one and two bedroom flats with potential for refurbishment. Around % of the portfolio, by value, is located in London. CITY ROAD CBRE Funding Team advised and brokered the financing of City Road, London for a developer called Groveworld Ltd. The scheme comprised a story private residential tower of units with a gross development value of million. CBRE approached the market with a targeted list of investors in order to source equity for the construction of the scheme. A joint venture was agreed with Orion Capital Managers in May which resulted in Groveworld Ltd securing the capital to commence construction while continuing the role of Developer Manager and a participation in the profit. London, UK Transaction date: May Equity Investment:,, Number of units:

30 CASE STUDIES CBRE s New York Institutional Group represented Privet Investments in the sale of its Park and Coast Portfolio of units located throughout Brooklyn, NY. Eleven communities were purchased for an average price of $, per unit. Of the buildings, two were located in Crown Heights and three were situated in the resurging area of Prospect Park South. Four properties were located in the niche market of Brighton Beach, while the remaining two properties were located in Sheepshead Bay and Prospect Heights. The properties had undergone substantial base building improvements over the previous years. CBRE was able to emphasize the favorable unit configurations, superb maintenance and extension renovation of the properties. As each neighborhood was substantially different and some were demographically quite unique, CBRE had to perform independent research for each respective neighborhood in order to convey the rent growth potential. Nearly $ million in additional revenue was pending the approval of several MCI applications, which had to be well documented for buyers. Through discussions and updates, investors recognized the quality of these assets as compared to the typical rental buildings in each neighborhood and the special story supporting the growth of each neighborhood. CBRE also illustrated the reliable delivery of the pending revenue from the MCIs. As a result, the portfolio sold for impressive metrics for a large portfolio located entirely in Brooklyn. PARK & COAST PORTFOLIO Brooklyn, NY Transaction date: December Acquisition price: $,, Number of units: CAPITAL MARKETS MULTI-HOUSING ANNUAL MARKET REPORT