Institutional-Quality CRE Returns Slip; Cap Rates Reach Historic Lows

Michael Tucker mtucker@mba.org

November 01, 2018


Institutional-quality commercial real estate returned 1.67 percent between July and September, down slightly from 1.81 percent in the second quarter, the National Council of Real Estate Investment Fiduciaries reported.

The NCREIF Property Index measures unleveraged returns from a pool of mostly core commercial properties held by institutional investors. The third quarter's 1.67 percent total return included a 1.11 percent income return and 0.56 percent capital appreciation. Both measures slipped quarter-over-quarter.

MBA Vice President of Commercial Real Estate Research Jamie Woodwell noted income is back at center stage as the key driver of property returns. "Not only does income account for the bulk of the unlevered returns NCREIF tracks, it's also increasingly important as the foundation of changes in property value," he said.

The average quarterly return over the past five years equaled 2.33 percent, or 9.65 percent annualized, NCREIF said. Although the current quarter's 6.86 percent annualized return is down from the previous five years, the 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 3.36 percent quarterly return, down slightly from 3.58 last quarter. Hotels followed closely with a 3.22 percent return, followed by offices at 1.69 percent and apartments at 1.55 percent. The retail sector once again trailed with a 0.56 percent return, down from 1.32 percent in the second quarter.

Occupancy for NCREIF-tracked properties rose again to 94.17 percent, the highest point in nearly 17 years. Industrial properties had the highest occupancy rate at 96.94 percent. But despite the record occupancy figure, rent growth slowed to 0.7 percent for the quarter compared to 1.54 percent in the second quarter.

Cap rates fell to their lowest level in the index's history, which dates to 1978, NCREIF said. Cap rates dropped to 4.32 percent averaged across all sectors.

"The fact that cap rates have reached record lows speaks to the interest investors continue to have in commercial real estate," Woodwell said.

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