Commercial Real Estate Returns Lowest Since Financial Crisis
CHICAGO, IL, April 24, 2020 – The National Council of Real Estate Investment Fiduciaries (NCREIF) has released first quarter 2020 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for 8,445 commercial properties, totaling $683 billion of market value. The returns are detailed in the attached Snapshot Report.
The total return was 0.71% in the first quarter which was a decrease from the 1.55% return for the prior quarter. This is the lowest return since the fourth quarter of 2009 which was the midst of the financial crisis that lead to the Great Recession. This is an unleveraged return for what is primarily “core” real estate held by institutional investors throughout the US.
NPI Total Returns Since Great Recession
The total return of 0.71% consisted of an income return of 1.10% from net operating income (NOI) and a capital return (change in value net of capital expenditures) of -0.39%. This is the first negative capital return since the 1st quarter of 2010.
Market Values Peaked
The NCREIF Market Value Index (MVI) tracks how estimated sale prices are changing over time for properties in the NCREIF Property Index. Market values had been rising steadily since the recovery from the Great Recession began in 2010. But this quarter the index flattened if measured on an equal weighted basis and declined slightly if shown on a value weighted basis.
Returns Drop for all Sectors
Returns dropped for all property types this quarter with hotels being impacted the most at a negative 3.86% return for the quarter. This was followed by retail with a negative 2.06% return. The other property sectors were positive even though they all dropped from the prior quarter. Industrial properties (primarily warehouse) continued to be the top performer with a quarterly return of 2.58% followed by office at 1.28%. Apartments managed to have a slightly positive return of 0.95% for the quarter.
NPI Total Returns by Property Type
Cap Rates Continue at Historic Lows While Occupancy Remains High
Occupancy declined slightly during the quarter to 93.8% from 94.1% last quarter. But this is before the impact of the Coronavirus may have impacted leases. Cap rates only increased slightly for the quarter to 4.71% from 4.67% last quarter. Whether we see further declines in values and returns will depend on whether cap rates continue to rise and if occupancy continues to fall.