The Institutional Real Estate Inc Sponsorship brochure, Connected-Investor Focused, We connect people, data and insights, sponsorship, events, IREI Products
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NAREIM DIALOGUES SPRING 2018 29 Rather than favoring one property category over another on a broad spectrum, current economic conditions require more detail and diligence in identifying those segments of each major asset type where opportunity for success exists. We have outlined key aspects of each type below and are focusing our core portfolio to take advantage of these specific trends to capture out-sized risk-adjusted returns. Multifamily: Submarkets Matter More Than Ever Higher quality assets in major markets collectively saw a 50 bps decline in vacancy rates for the year ended 2017. Reduced construction lending, increasing construction costs and tapering rent growth foretells an eventual decrease in supply and this supports increasingly favorable fundamentals going forward. > Vacancy Rate Multifamily housing, particularly in the coastal blue states, should benefit the most from the recently passed tax bill as the reduced mortgage interest deduction caps, and caps on state and local tax deductions will tilt the "rent vs. own" economics toward renting most in these high cost housing and tax markets. This benefits higher-end multifamily housing demand in markets with low affordability, as the already prohibitive cost of owning only increases. Alternatively, the advantage already enjoyed by lower cost states will increase as the cap on state and local tax deductions impacts higher cost states. While a significant slowdown in supply has yet to materialize nationally, activity in select submarkets is creating targeted opportunities this year. With strong supply in many submarkets and less new competition in others, discipline in submarket selection will be the key to multifamily investment success in 2018. Key Core Investment Strategy Success Factor: Discipline in submarket selection will be the key to investment strategy success in 2018. Office: Most in Need of Boost from Tax Reform Moderating employment growth and increased tenant willingness to pay outsized premiums for top quality assets characterized the office sector in 2017 with the negative effects of moderating employment growth impacting the sector more than any other. > Employment Add to this increasing supply, 2017 saw a softening in office property rent growth. As future employment growth continues to be constrained by an increasingly small supply of qualified workers, the office sector is the most likely to benefit from the recently passed tax bill delivering the promised acceleration in wage growth. If the rate of wage growth were to materially increase, that could encourage workers currently on the sidelines to reenter the labor force, creating greater employment growth. While today's stagnant rate of wage growth – despite the low unemployment rate – is a cautionary tale in forecasting outsized future wage growth, a moderate increase in the rate of wage growth is plausible based on an ever-tightening labor supply. Even a moderate uptick in wages would be beneficial to the office sector's prospects in 2018. As companies face increasing challenges in recruiting and retaining top talent, the highest quality assets will continue to reap outsized rent premiums relative to next tier assets as companies use high quality work environments as a competitive tool in attracting and retaining talent. Key Core Investment Strategy Success Factor: Focus on best-in-class assets occupied by larger higher credit quality tenants with longer-term leases and contractual rent escalations. Source: Bureau of Labor Statistics Source: CoStar ©iStock.com/RomoloTavani