3 Market Briefs – The Outlook for Apartments, China & MOBs

Residential Markets: Despite overall economic uncertainty, the apartment sector is fulfilling its rebound promise.

One private-sector market that continues to buck the economic doldrums is multifamily for rent.

In a January 2012 entry on the AEC Insight blog, under the headline “Apartment Market Strong in 2012,” we reported that commercial real estate specialist Marcus & Millichap (Calabasas, CA) was calling for a noticeable increase in construction activity in the apartment sector.

“Developers are getting busy, as are lenders and equity investors. And, after the brief pause in late 2011, we should see more projects started, steadily boosting additions to supply over the next three years. For the time being, demand will outstrip supply additions by a wide margin, leading to lower vacancy across virtually all markets and the first year of broadening rent growth.”

Despite the sluggish overall recovery, the apartment sector has held its expected course.

In its Second Quarter 2012 assessment of the apartment market, Marcus & Millichap reported, “The disappointing and markedly slower pace of employment gains had little impact on the steady demand for apartments in the second quarter. Rental housing remains essential for a growing population, even in periods of uncertainty and economic malaise. Conditions remain favorably aligned for sustainable, strong apartment performance. Robust demographic trends, including higher levels of immigration, the surge in echo boomers forming their own households, a further shift away from homeownership, and the growing diversity in household composition support continued demand for rental housing.”

Vacancy rates in major metropolitan cities such as New York (2.2%), Minneapolis (2.4%) and San Jose (2.5%) are miniscule. Even cities experiencing relatively high vacancy rates, such as Jacksonville (8.2%), Houston (7.6%) and Atlanta (7.1%), are seeing these rates plummet. This all bodes well for the apartment market in 2013.

The 2013 Guide to the U.S. AEC Markets assesses which cities and regions will see the greatest increase in apartment construction activity – and when. The book also addresses other aspects of the multifamily market, including when condominiums are likely to return to favor, senior housing’s outlook and other trends.

International Markets: Checking in on China 

In a blog entry in August 2011 (Is China Over for…U.S. Firms?), we asked if the allure of China for AEC professionals had waned. The clear conclusion was that there was still work for U.S. firms, but that competition was stiffer and the need for “Western expertise” had diminished some.

In that blog article and two research publications – The 2012 AEC Market Guide to California and PSMJ’s AEC Firm U.S. Market Sector Outlook – we quoted Andrew Nathaniel Mayer, an American architect (and blogger) living and working in China. This included his review of an article in the New York Times, in which he wrote: “The New York Times finally caught up to what savvy architecture firms in the U.S. have known for at least the past decade: there is a lot of work to be had in China.”

Mayer told us via email:

When it comes to Western or American AEC firms working in China I would have to say that the larger corporate firms have an edge up in entering the market due to their resources and reputation. Chinese firms are getting smarter now and moving up the value chain quickly so I foresee less need for ‘Western expertise’ in the future.

That being said, China is still open to qualified companies, provided those firms play by China’s rules and partner up with local joint venture companies. No part of China is off limits to western firm involvement, but the interior parts of the country are the areas booming at the moment.

A year later, is this still the case?

Mayer clearly thinks so. He notes that the country’s gross domestic product continues to grow at about a 10% rate, while population growth is slowing. Mayer references a recent demographic study of the country that states, “it would easily become the largest economy in the world if its per capita gross domestic product (GDP) came even close to that of other countries. China, the world’s second-largest economy to the U.S., has a per capita GDP less than $5,200, compared with the United States’ per capita GDP of more than $48,000.

Mayer concludes, “My conservative prediction is that China has about 5-10 years left of strong economic growth. The per capita GDP is still remarkably low, mostly due to the hundreds of millions still living in rural areas. The potential to earn much higher wages in urban areas (where salaries are raising rapidly) ensures that there is a steady of influx of people into cities.”

The Guide’s section on the international markets probes further into the outlook for China and other major nations, as well as the best routes and greatest difficulties for U.S. firms working in foreign lands.

Institutional Markets: The future of MOB construction.

In some ways, medical office buildings (MOB) are a microcosm of the overall health care construction market. While activity in MOB construction is solid, it is not as robust as many expected it to be.

A summary of the 2012 Medical Office Buildings & Healthcare Facilities Conference of the Building Owners and Managers Association International (BOMA) (Washington, DC) concluded that capital constraints continue to plague healthcare systems.

Laca Wong Hammond, Head of Healthcare Real Estate for investment company Raymond James (St. Petersburg, FL) and Morgan Keegan, 2013 Co-Chair of BOMA’s Medical Office Buildings and Healthcare Facilities Committee, wrote: “While investor appetite for healthcare real estate remains strong, transaction volumes, especially large monetizations of medical office portfolios, have continued to be lighter than expected. Development activity has been slower than expected, and many healthcare systems are weighing the merits of using third party capital versus using their own, particularly with historically low bond rates. Not-for-profit systems increasingly report significant capital challenges, including concerns about taxation, as cash-strapped states are looking for additional revenues.”

Healthcare Trust of America (HTA) (Scottsdale, AZ), a real estate investment trust (REIT) with more than 250 healthcare properties (more than 90% MOBs) in 26 states, is bullish on the outlook for MOBs in the next few years…as long as you’re not talking about design, construction or development in general.

In its annual report, HTA notes, “Construction activity in the medical office sector has been relatively constrained, particularly considering the two large population waves that are just entering periods of increased healthcare utilization. Additionally, the importance of close proximity to medical campuses or hospitals, which are oftentimes locations with little developable land or high cost barriers to development, curtails new medical office construction. With little new medical office product expected in the near term, tenant demand will focus on existing well-located properties.”

Despite the relative weakness of the MOB development market, activity will continue in some locations and for some project types. For example, Marcus & Millichap’s John Smelter says that off-campus MOBs are gaining in favor: “Major property owners and lenders continue to show favor for on-campus medical buildings, but off -campus buildings will become ever more attractive as health systems and other providers respond to patient demands for greater convenience and readily accessible care,” he says.

Given the nation’s demographics and the AEC industry’s recent boom in healthcare projects, this is obviously a key sector to consider. The 2012 Guide devotes a full section to the outlook for health care projects in 2012 and beyond, as well as several pages in the chapter on industry trends.

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