Commercial Real Estate Returns Turn Negative with Historical Drop in Rent
CHICAGO, IL, July 24, 2020 – The National Council of Real Estate Investment Fiduciaries (NCREIF) has released second quarter 2020 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for 8,652 commercial properties, totaling $696 billion of market value. The returns are detailed in the attached Snapshot Report.
The total return was -0.99% in the second quarter which was a decrease from the 0.71% 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. The leveraged returns for those properties in the index that have leverage was -2.76% for the quarter because the properties were earning less than the cost of debt.
NPI Unleveraged Total Quarterly Returns Since Great Recession
The total return turned negative for the quarter because the capital return (change in value net of any capital expenditures) of -2.00% offset the net operating income (NOI) return of 1.01%.
Rent and NOI at Historic Lows
Both rent and NOI growth rates were the largest decline since NCREIF started collecting data which goes back to 1978 for NOI and 2001 for Rents. Not surprising, hotels had the greatest rent decline of 48.73% due to the impact of COVID-19 followed by retail with a 12.68% decline.
2nd Quarter 2020 Change in Rents by Property Sector
Returns Drop for all Sectors
Total returns were lower for all property sectors this quarter and they were negative for all property types except industrial which had a negative capital return but the income return offset that to deliver a positive 1.02% return.
NPI Total Quarterly Unleveraged Returns by Property Sector
While NCREIF members are long-term investors for most of the funds, there are typically between 100 and 200 sales of properties each quarter. This quarter the number of sales dropped to 30 properties. The lack of transactions in the overall commercial real estate market has made price discovery challenging for appraisers and resulted in less liquidity for investors.
About the NCREIF Property Index The NPI consists of 8,652 investment-grade, income-producing properties with a market value of $696 billion. The market value breakdown by property type is about 35.6% office, 25.4% apartment, 20% retail, 18.7% industrial and .3% hotel properties.
The NPI includes property data covering over 100 CBSAs. In addition, within each property type, data are further stratified by sub-type. These data enhance the ability of institutional investors to evaluate the risk and return of commercial real estate across the United States.