This is not to say that investors are less interested in the large US markets. Los Angeles/Southern California has been the top-ranked metro in the Americas since 2016, says CBRE, followed by Dallas/Fort Worth.

However, as more investors shift their attention to smaller loca¬tions, Tier I markets are becoming less appealing to investors. At the same time, interest in most Tier II and Tier III metros is grow¬ing. Denver, Phoenix, Orlando, Nashville, Minneapolis/St. Paul and Las Vegas all climbed higher in CBRE's ranking of the cities that are most attractive for investment for the third year in a row.

Tampa, San Diego and Portland were not as popular as they were in 2018, but still ranked higher than they did in 2017. Among the rising Tier II and Tier III markets, only Denver and Phoenix appeared as recently as 2016.

The survey also found that 40% of respondents are actively pursuing one or more real estate alternatives. CRE debt remains the most common sector, at 52%, followed by self storage, seniors housing and student housing, each of which were favored by nearly 30% of investors. None of this, however, is to suggest that investors are completely shying away from the CRE transaction market this year. Overall, the survey found that 98% of the respondents intend to make acquisitions in 2019.—Erika Morphy

SECTOR SPOTLIGHT: Institutions Bet Big On SFR, Workforce Housing

Amherst Residential, the residential real estate division of the Amherst Group LLC, recently closed on the acquisition of 446 single-family rental homes for $103.3 million. The properties are located in 43 markets across 18 states, including Miami, Atlanta, Memphis and Phoenix, and Greensboro/Winston Salem, NC.

The company has been snapping up single-family rental assets at a rapid clip since October 2018. Since that time and including this transaction, the Austin-TX-based firm has acquired 2,400 single-family rental properties valued at approxi¬mately $404.1 million. With these acquisitions, Amherst Residential has expanded its national footprint to cover 29 mar¬kets and entered new markets including Salt Lake City, Las Vegas, Seattle and Denver.

The firm is taking advantage of the market fragmentation in the single-family rental home space, says Drew Flahive, presi¬dent of Amherst Residential. Since establishment in 2012, the company has acquired in excess of 23,000 single-family homes. It is targeting the purchase of more than 10,000 single-family rentals by the end of 2019.

Meanwhile, global private markets investment management firm Hamilton Lane has recapitalized a workforce housing port¬folio owned by Asia Capital Real Estate for $147 million. Located in Florida, Ohio and Georgia, the 1,700-plus apart¬ments have been folded into a new fund structure.

It is a significant transaction for ACRE not only for its size but also because of its institutional backing. according to Michael Van Der Poel, who is co-founder and managing partner of the long-term affordable housing owner operator.

“We have been investing in workforce and affordable hous¬ing for seven years and have spent much of that time educating institutional investors about their merits and differentiating factors,” he explains.

Until now, Van Der Poel adds, ACRE had secured much of its financing from family offices. The single-family rental space “is typically a non-institution asset class but increasingly, we are see¬ing pension funds and other such inves¬tors express an interest in our model.”

The business case is straightforward: there is an ongoing affordable housing crisis in the US along with a shrinking supply of housing among B and C grade properties. This demand-supply mis¬match creates an opportunity for institu¬tional investors that want to see buildings running full, he explains.

Van Der Poel, who says ACRE has been posting 20% IRRs for its funds, says that for institutions, “it's a chance for social impact investing with great returns.”

Currently, ACRE is deploying its third private equity fund focused on work¬force housing which, along with sepa-rately managed accounts, exceeds $250 million.—Erika Morphy

CAPITAL VIEW: Debt Funds Shift Lending Landscape

One of the more interesting trends this cycle has been the effect that debt funds have had on capital flows, according to panelists at MBA CREF/Multifamily Housing Convention and Expo 2019.

Debt funds have clearly come into their own as a mainstream source of CRE finance, the panelists said, while at the same time other capital sources are also leveraging their strategy by provid¬ing warehouse lines, investing in funds or even acquiring funds.

Competition from banks is diminishing as their risk depart¬ments are strengthened. “When you put significant ropes on that source of capital, it does have a significant impact on the lending market,” one panelist said. “Global banks are still gun shy on real estate portfolios.”

For debt funds and other capital sources, though, “it is an opportunity rich environment,” said Jack Gay, managing direc¬tor and global head of debt at Nuveen Real Estate. “People are looking for ways to get value-add deals executed.”

Indeed, capital is so plentiful that in some cases funds are coming up with new structures to accommodate it.

“If you have a $400-million debt fund and you are trying to build a diversified portfolio, what are you going to put in each position, $20 million? That forces you to cater to certain demo¬graphics and borrowers,” commented Justin Guichard, a manag¬ing director with Oaktree Capital Management LLC. “We haven't seen the number of funds raised that focus on that type of bor¬rower, neither from a caliber of asset nor from a capital require¬ment perspective, so we feel comfortable with what we are invest¬ing in. Our targets are in line with what our investors expect.”

He added that the regulatory environment has been a tailwind. As the industry matures, it's being viewed as a more permanent part of the capital structure, he explained. “We're getting closer to the end of the cycle and have raised large distressed debt funds; we're preparing ourselves for the next downturn.”—Natalie Dolce

REIT WATCH: Where REITs May Outperform This Year

Even with political uncertainty in Europe, the potential for US monetary policy missteps and threats of an escalation in the trade war, PGIM's Rick Romano anticipates 2019 will be a favorable year for the US REIT market.

According to Romano, industrial, manufactured housing and cold storage sectors are poised to outperform expectations in 2019. Each of these sectors should see REITs leading cash flow growth and they will even have the opportunity for upward earnings revi-sions during the year.

Industrial: The industrial sector continues to benefit from e-commerce-driven demand particularly in the last mile of distribu¬tion. Additionally, institutional capital continues to be focused on industrial which should prevent cap rates from expanding. “We continue to monitor supply but with the exception of a few markets we continue to see a landlord's market for pricing power,” says Rick Romano, head of Global Real Estate Securities at PGIM Real Estate.

Manufactured Housing: As more institutions recognize it as an investable property type, manufactured housing continues to ben¬efit from institutional capital flow. Due to the affordability and the age-restricted focus of the property, demand for manufactured housing remains defensive. It is also difficult to add supply which remains very constrained. Additionally, operating margins remain higher than traditional multifamily, and there is an opportunity for the public REITs to continue to consolidate the space, says Romano.

Cold Storage: This segment is very attractively priced in the pub¬lic markets relative to private market transactions and more institu¬tional capital is being drawn into the sector, which may result in a cap rate compression. Cold storage benefits from a needs-based defensive demand (food storage). The potential for further grocer e-commerce penetration, which still has to come into its full poten¬tial, will further drive demand. Additionally, the property type's ownership is very fragmented leading to consolidation opportuni¬ties to drive external growth.

“The storage market is currently at the peak of a supply cycle. Starting in 2016, the sector saw a dramatic increase in new supply averaging roughly 5% to 8% of existing stock annually over the past three years,” says Romano.

Senior Housing: Though it's also suffered from above-average supply additions over the last several years, senior housing's con-struction pipeline is clearly moderating—now representing 6% of existing stock—down from 7% in 2016-2017. That said, 6% is still a high number and most healthcare REITs are expecting negative SS NOI growth in 2019. “In addition to a competitive supply, senior housing operators face constant pressure from rising labor costs which represent roughly 60% of total expenses,” says Romano.

On the positive side, the demographic demand wave from the aging population in the United States is undeniable and should really kick into gear in 2020 and beyond. So while 2019 is likely to remain a tough year for the sector in the public markets, the set-up looks highly favorable over the long-term.

According to Romano, REITs should continue posting stable operating fundamentals with 2% to 3% same-store NOI growth resulting in cash flows of 5% to 7% and dividend growth over the next 12 months, he explains. That said, performance will vary among property types, with industrial likely to see the best NOI growth at more than 4%, while retail and storage are likely to be on the lower side, at 1% to 2%.—Tanya Sterling ◆

NEW ECONOMY: Migration Trends Fuel Growth for CRE Services

In mid-December the US Census Bureau released figures on pop¬ulation growth over a 12-month period that ended July 1, 2018, as well as state-to-state migratory patterns. While the study showed one of the population gains since 1937 (0.6%), it clearly defined four western states with the greatest population growth, year-over-year: Nevada (2.1%), Idaho (2%), Utah (1.85%) and Arizona (1.7%). Not surprisingly, Texas and Florida continue to be among the fastest-growing states in the country by population.

Jay Olsholsky

The survey made me curious to find out if some of our offices had expanded to capitalize on growth in their states.

Principals from NAI offices in Las Vegas (which also serves St. George and Lehi, Utah), Reno, Phoenix, Salt Lake City and Boise responded to my query with a resounding “affirmative!”

The following brief account of busi¬ness growth in these four states is an example others may follow, or already have. It may also serve to provide insight for investors and developers seeking the best returns on their capital.

American mobility is often driven by cost-of-living issues and life cycles. According to Bankrate's cost of living calculator, a profes¬sional earning a $75,000 annual income in the San Francisco Bay Area could maintain the same standard of living earning $40,816 in Austin, where overall costs are 45.6% less—including 74% and 67% respective reductions in median home price and apartment rent.

As Phoenix and Tucson have seen significant in-migration from California and other states in recent years, our offices there have added more agents, production and services. Local principal Terry Martin-Denning of NAI Horizon reports 30% revenue growth over the past three years, as well as the addition of a self-storage practice group, five new agents in Phoenix and two in Tucson. The area's educated workforce has made it a good candidate for technology and financial services firms, she reports, adding that the state's favorable cost of living and tax rates make it attractive to companies that are expanding or relocating.

Taxes are indeed a major driver in the popularity of these states. Personal income tax Florida, Texas, Nevada, Utah, Idaho and Arizona ranges from zero to 6.925%. By comparison, income tax ranges from 4% to 13.3% in California, New York and Connecticut.

In Reno, NAI Alliance added a multifamily investment sales spe¬cialist, as well as agents focusing on retail, office and industrial and a generalist because population growth has driven demand across all sectors. Reno's proximity to California is the main reason for its growth, says SVP and principal Kelly Bland.

In the past 12 months, NAI Vegas added eight agents across all property sectors, according to COO Jon Walter. His group also opened a new office in Northern Utah's Lehi City in 2018, which is an area dubbed “Silicon Slopes” for the tech companies that have clustered there and the skiing nearby. In the past 18 months, these offices have increased revenue and sales agents by over 50%.

In Salt Lake City, NAI Premier has added eight new agents and one property manager in the past year, and plans to open another office in the next year with three to seven new agents. Its brokerage revenue nearly tripled over the past three years, while staff grew from three to 22. Launched two years ago in Boise, NAI Select has already grown its management portfolio by 30% and added five new brokers last year. The broader market has seen a substantial influx of people from coastal cities who are drawn to the quality of life.