CRE Returns Continue Moderation Trend

Institutional-quality real estate returned 2.21 percent in the first quarter, down from 2.91 percent in the fourth quarter, the National Council of Real Estate Investment Fiduciaries said. 

NCREIF’s Property Index, which measures the return of a large pool of core unlevered properties, returned 3.09 percent in third-quarter 2015. A 1.17 percent income return and a 1.04 percent appreciation return yielded the first-quarter figures. The annual total return through the first quarter equaled 11.84 percent–4.94 percent income and 6.66 percent appreciation.

“While there has been somewhat of a leveling off of the robust real estate sector, key drivers including occupancy growth continue to improve along with strong transaction volume,” said Ernie Katai, Executive Vice President and Head of Production with Berkadia, New York. “We are optimistic going into the balance of 2016.”

Appreciation strengthened over 2015 to its highest annual return since 2007 before edging down in the first quarter, NCREIF said. Meanwhile, the annual income return trended downward over the past five years to its current 4.94 percent, the lowest for any trailing four‐quarter period in the survey’s history. For longer‐term context, the annualized total return averaged 11.93 percent for the past five years and 7.61 percent over the past decade.

Industrial and retail assets led performance for the quarter and the trailing year, NCREIF said. Both property types returned 2.96 percent in the first quarter with trailing-year returns of 14.30 percent for industrial and 13.11 percent for retail. Apartment and office total returns have trended close together with apartments slightly leading for the quarter and the year. But with sub‐2 percent quarterly returns and annual total returns of 10.92 percent for apartment and 10.78 percent for office, both property types continued to trail the NPI. Hotels remained the weakest property type with a 1.16 percent total return, becoming the only property type to experience depreciation in first-quarter 2016. Over the trailing year, hotel returns slightly trailed the NPI at 11.71 percent.

Despite weaker income returns, property fundamentals remained solid in the first quarter as occupancy edged up to 93 percent–the highest level since 2001–and trailing-year net operating income grew 6.6 percent. Occupancy increased across property types for the quarter and the year. Industrial saw the strongest occupancy gains and continues to boast the highest occupancy rate of any property type. Apartments saw the second-highest occupancy rate. 

Apartments remain the leader for trailing-year NOI growth at 9.5 percent, NCREIF reported, followed by industrial with 8.2 percent NOI growth.