Institutional-Quality CRE Returns Grow in 2Q
Institutional-quality commercial real estate returned 1.81 percent between April and June, up from 1.70 percent in early 2018, the National Council of Real Estate Investment Fiduciaries reported.
The Property Index, which measures unleveraged returns from a pool of primarily core commercial properties held by institutional investors throughout the U.S, reported second quarter’s total return included a 1.14 percent income return and 0.67 percent capital appreciation.
MBA Vice President of Commercial Real Estate Research Jamie Woodwell said property incomes increasingly drive commercial property returns. “Rising property cash flows have buoyed property values, but for most property types two-thirds or more of the total return has come through income, as opposed to appreciation,” he said, adding that based on investor sentiment surveys and current market conditions, this trend is likely to continue.
“While the quarterly NPI total return remains modest, returns for the second quarter of 2018 were the highest return for the NPI since the second quarter of 2016,” the report said. The average quarterly return over the past five years equaled 2.38 percent, or 9.85 percent annualized.
Although the current quarter’s 7.44 percent annualized return is down from the previous five years, the downward drop in returns stopped in early 2017 and returns have held “remarkably” steady since then, the report said.
Industrial properties continue to outperform other sectors with a 3.58 percent quarterly return. Hotels were a distant second at 1.95 percent followed by offices and apartments at 1.54 percent. Retail recovered from 0.72 percent in early 2018 to 1.32 percent in the most recent quarter.
Occupancy for NCREIF-tracked properties reached the highest point in more than 15 years at 93.75 percent, up from 93.5 percent last quarter. Industrial properties had the highest occupancy rate at 96.73 percent, followed by retail at 92.82 percent.
“Rent growth turned positive again this quarter after having been negative in the first quarter of 2018,” the report said. Cap rates increased slightly to 4.94 percent nationally, up from 4.86 percent the prior quarter.
Though the NPI represents unleveraged property performance, about half of the properties in the index use leverage, which can provide higher returns given the low interest rate environment. For the 3,658 properties with mortgages, the leveraged total return equaled 2.13 percent in the second quarter or 8.80 percent annualized.
“Thus, leverage continues to be favorable with the unleveraged return exceeding the interest rate on the debt financing used by the properties in the index,” the report said. For properties that have leverage, the average loan-to-value ratio was 42 percent and the average annual interest rate was just over 4 percent, up slightly from the first quarter.
