Research - APRIL 17, 2017

Commercial property delivers modest performance in first quarter

by Denise DeChaine

The National Council of Real Estate Investment Fiduciaries has released first quarter 2017 results for the NCREIF Property Index.

The quarterly NPI total return was 1.55 percent in the first quarter 2017, down from 1.73 percent in the fourth quarter 2016 and 2.21 percent in the same quarter a year ago. The first quarter 2017 total return consisted of a 1.15 percent income return and 0.40 percent appreciation. The income return, although modest, has been relatively stable over the past three quarters. Appreciation has experienced a downward trend since 2015 and first quarter 2017 marks the fourth consecutive quarter of sub-1 percent appreciation.

For the trailing year, the annual NPI total return was 7.27 percent, consisting of a 4.73 percent income return and 2.45 percent appreciation.

Industrial remains the best performing property type and recorded 2.83 percent quarterly and 12.18 percent trailing year total returns. Retail was the only other property type to outperform the NPI, although by a narrow margin. Apartments had a 1.30 percent first quarter and office had a 1.11 percent income return and 0.16 percent appreciation in the first quarter. Hotels experienced a fifth consecutive quarter of depreciation for a –0.16 percent total return in the first quarter and a 3.34 percent total return for the trailing year.

Property fundamentals remain resilient in early 2017. Occupancy, at 93 percent, was flat over the year, although down 20 basis points from fourth quarter 2016. Although apartment was the only property type to see occupancy gains over the quarter, to 93.5 percent, this was down 30 bps from one year ago. Over the trailing year, office and industrial had occupancy gains of 70 bps and 20 bps, respectively, while retail occupancy fell by 100 bps. Industrial has the highest occupancy rate, at 95.8 percent. Net operating income growth was 5.8 percent (including hotels) for the trailing year. Industrial holds the lead for annual NOI growth, at 6.8 percent, while apartment and office closely tracked the overall NPI. Retail had 5.2 percent NOI growth over the past year.

Transaction volume for NPI properties totaled $6.6 billion in the first quarter 2017 with 121 properties sold, down from $7.5 billion for 184 properties during the same quarter a year ago.

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