3 commercial real estate assets that are driving growth

With close to $380 billion of capital awaiting investment, commercial real estate investors are eyeing asset classes that are seeing heightened attention due to macro trends taking place across the country.

The affordable housing deficit is driving an increased focus on manufactured housing communities, while changing mobility and migration patterns across the U.S. are leading to greater interest in self storage. And expected enrollment gains at large universities mean there’s more demand for student housing options.

Three senior vice presidents with Capital One’s commercial real estate team—John Hope, Prithvi Mohan and Peter Szewczyk—recently talked with the Business Journals about the driving factors behind growth in these asset classes and how Capital One is working with clients to finance deals.

Manufactured housing is drawing the attention of investors as the affordable housing crisis continues to worsen across the U.S. Historically, this asset class has had low turnover, high tenant occupancy and been resilient throughout economic cycles, Szewczyk said.

“Manufactured housing is one of the last remaining options for truly affordable housing in the U.S.,” he said. “Not only are prices soaring for apartments and traditional site-built homes, but also there are supply constraints driving more people toward this type of prefabricated housing.”

Some key growth trends, according to real estate services firm JLL, include:

• Investment in manufactured housing communities reached $4.5 billion in the third quarter of 2021, representing an all-time high.
• Valuations for manufactured housing communities reached an all-time high of $46,970 per pad in the second quarter of 2021.
• Stabilized occupancy rates continue to reach new highs at 95.4%.

Capital One has built significant expertise with this asset class through its agency financing business. The bank is expanding on this expertise by bringing additional manufactured housing debt products to the market. Balance sheet and bridge lending will focus on strategic borrower relationships—sponsors and operators that have a strong track record within the manufactured housing space—and high-quality, property-specific opportunities.

Self storage needs have continued to rise in growing cities, particularly due to recent migration patterns and increased mobility. These factors have been accelerated by the pandemic-related shift to remote work. Self storage also benefits from dynamics that aren’t tied to the ebbs and flows of business cycles, such as life changing events like marriage, divorce, death and going to college, Mohan said.

Meanwhile, the evolution of the product has helped boost investors’ attention.

“You used to think of self storage as a single floor building in suburbia,” Mohan said. “Over the past couple of decades there’s been a modernization push. Increasingly, you’ll find self-storage units that are climate-controlled, multi-story, have first-rate security and can fit into the cityscape. This is all in addition to the historic benefits of the asset class including above-average profit margins and a highly sticky and less price-sensitive tenant base.”

Some key growth trends include:

• Self-storage outperformed all sectors during the pandemic, with real estate investment trusts (REITs) posting a 70.4% return from March 2020 through November 2021, according to Inside Self Storage.
• The overall U.S. self-storage market grew by 79.4% in 2021, according to Morgan Stanley.
• The global self-storage market was valued at $48.02 billion in 2020 and is expected to grow to $64.71 billion by 2026, according to Mordor Intelligence.

Capital One is investing in a specialized approach to this asset class. While it shares characteristics and demand drivers with other asset classes, the team is building out its expertise and resources to create industry-specific solutions that help clients get deals done.

Due to the demand for high-quality, well-located student housing properties in top-tier markets and the perceived resilience of the asset class, Capital One is seeing new institutional investors pursuing larger portfolio deals in a highly competitive environment, Hope said. Meanwhile, developers continue to focus on designing purpose-built housing that centers around the student experience.

This asset class was more negatively impacted by the pandemic than others because of the shift to remote learning. But as the economy reopened and vaccines continued to be distributed in 2021, the student housing industry strengthened, Multi-Housing News reported.

“College enrollment is one of the key drivers behind growth in student housing today,” Hope said. “While we’re seeing compelling enrollment trends across the top 200 universities in the U.S., it’s especially prevalent at larger, public universities. As demand continues to pick up for this asset class, it’s leading to more institutionalization among assets, sponsors and investors.”

Some key growth trends include:

• The sector experienced a near-record transaction year in 2021, exceeding $10 billion in investment sales volume, according to CBRE.
• The fourth quarter of 2021 exceeded the fourth quarter volume for the last three years with 55%, or $5.52 billion, of the transaction volume. This also exceeded every other quarter in the prior three years by more than four times, on average, according to CBRE.
• Berkadia reported that 2021 saw a dramatic rise in portfolio sales, which accounted for $3.5 billion of the overall transaction volume. Given the relatively favorable cap rates and resilience of the category, student housing was a popular asset for private and institutional investors who made up 59% and 23% of the acquisition volume, respectively.

While student housing is a derivative of conventional multifamily housing, it has its own nuances, which requires greater specialization. Capital One is relying on its specialization in student housing, developed over the last 10 years, to provide a differentiated lending experience for its clients, both through its agency platform and on its balance sheet.

Learn more about how Capital One’s commercial real estate division is helping investors finance deals.

This article was originally published in The Business Journals.