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

Michael Tucker mtucker@mba.org

April 30, 2019


Institutional-quality commercial real estate returned 1.8 percent in the first quarter, up significantly from 1.38 percent in late 2018, the National Council of Real Estate Investment Fiduciaries reported.

The return has averaged 1.67 percent over the past four quarters.

"The positive capital return indicates that on average, properties in the NPI are still increasing in value after deducting capital expenditures that have been added," the NCREIF Property Index said. "Thus, the commercial real estate market as reflected by the NPI has not yet peaked as some thought may have happened [in late 2018]."

The NCREIF Property Index measures unleveraged returns from a pool of mostly core commercial properties held by institutional investors. The first quarter's 1.8 percent total return came from a 1.11 percent income return and a 0.69 percent capital appreciation return.

MBA Vice President of Commercial Real Estate Research Jamie Woodwell noted commercial real estate investors continue to earn strong returns as property incomes and values both increased in the first quarter. "Property incomes are increasingly the driver for investors, and while income returns are relatively consistent between property types, investor sentiment has led to differences in appreciation between different property types," he said.

NCREIF said returns for retail properties rebounded in early 2019 from a negative 0.43 percent in late 2018 to a positive 1.74 percent. Retail was the main sector that boosted the index during the quarter. Industrial properties remain the strongest performer, returning 3.02 percent during the quarter. The office sector followed with a 1.63 percent return, followed by apartments at 1.35 percent. Hotel returns remained positive but dropped from 1.21 percent in the fourth quarter to 0.44 percent.

After edging up slightly last quarter--which some analysts predicted would be the new trend--cap rates declined to 4.69 percent during the quarter, the lowest in the index's history. "This also contributed to the rebound in the NPI for the quarter," NCREIF said.

Commercial real estate occupancy dipped but remained very high at 93.82 percent compared to 94.0 percent last quarter, the report noted.

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