Institutional-Quality CRE Ends 2017 on Positive Note

Institutional-quality commercial real estate returned 1.80 percent between October and December, making it 2017’s best quarter, the National Council of Real Estate Investment Fiduciaries reported.

The Property Index measures the unleveraged return from a large pool of primarily core CRE properties held by institutional investors throughout the U.S. The total quarterly return included 1.16 percent income return and 0.63 percent capital appreciation return.

While the quarterly Index total return remained modest, “returns for the fourth quarter of 2017 were the highest quarter for the year,” the report said. Total returns increased from 1.70 percent in the third quarter and exceeded fourth-quarter 2016’s 1.73 percent return. The full-year 2017 return was just under 7 percent.

MBA Vice President of Commercial Real Estate Research Jamie Woodwell said market perceptions clearly affected the NCREIF numbers. “Income returns for most property types were within a range–with apartments, office, retail and industrial all seeing income returns of between 4.4 percent and 5.1 percent during 2017,” he said. “But differences in the outlooks for different property types mean that appreciation boosted total returns for some property types–such as industrial–far more than others, such as retail. He noted industrial assets returned 13.1 percent in 2017 compared to 5.7 percent for retail.

The NPI calculates unleveraged property performance, but Woodwell noted leverage remains a positive for investors. Nearly half of properties in the index use leverage, which can yield higher returns, given the current low interest rate environment. For nearly 3,700 properties in the index that used borrowing, the leveraged total return was 2.2 percent in the fourth quarter and 9.4 percent for the year.

“Thus, leverage continues to be favorable with the unleveraged return exceeding the interest rate on the properties in the index,” the report said, noting for properties that use leverage, the average loan-to-value ratio is 41 percent and the average interest rate is just under 4 percent.

NCREIF said overall occupancy rose to 93.6 percent, a 16-year high. Industrial properties saw the highest occupancy rate at 96.3 percent, up from 96.1 percent the quarter before. The second-highest was retail at 93 percent, down slightly from 93.08 percent the prior quarter.