The National Council of Real Estate Investment Fiduciaries (NCREIF) has released third quarter 2017 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for 7,165 commercial properties, totaling $543.5 billion of market value.
The quarterly NPI total return remains modest and has been relatively stable, ranging from 1.55 percent to 1.77 percent over the past five quarters. The total return was 1.70 percent in the third quarter 2017, down from 1.75 percent last quarter and 1.77 percent in the third quarter 2016. The third quarter 2017 total return consisted of a 1.14 percent income return and 0.56 percent appreciation. Over the past five quarters, both components of the total return have been relatively stable with the quarterly income return ranging from 1.14 percent to 1.16 percent and appreciation in the 0.40 percent to 0.60 percent range.
For the trailing year, the annual NPI total return was 6.89 percent, consisting of a 4.66 percent income return and 2.15 percent appreciation. For longer-term context, the annualized average total return for the past five years was 10.35 percent and 6.23 percent over the past decade.
The NPI represents unleveraged property performance. However, about half of the properties in the NPI utilize leverage, which can provide an opportunity for higher returns given the longevity of low interest rates. For the 3,568 NPI properties utilizing leverage, the leveraged total return outpaced the NPI at 2.01 percent in the third quarter 2017 and 8.96 percent for the trailing year.
Industrial remains the strongest performer by property type with total returns of 3.29 percent in the third quarter and 12.80 percent for the trailing year. Other NPI property types continue to trail industrial by a wide margin. In the third quarter, hotel experienced a reversal in its six-quarter depreciation trend with slight 0.08 percent appreciation, resulting in the second strongest quarterly total return, at 2.30 percent. Apartment landed in the middle of the pack for the quarter with a 1.66 percent total return, while having the second strongest trailing year total return of 6.22 percent. Office and retail both experienced a step down in quarterly appreciation this quarter for weaker total returns of 1.40 percent and 1.20 percent, respectively. Over the trailing year, total returns for both office and retail are roughly 6 percent, similar to the apartment sector.
After rising to a 16-year high of 93.3 percent last quarter, occupancy for NCREIF-tracked properties held steady in the third quarter. Quarterly occupancy changes were varied by property type, while year-over-year occupancy was fairly steady across the sectors. Industrial still has the highest occupancy rate, at 96.1 percent, which was up 20 basis points over the quarter. Retail was the only other property type to experience gains in the third quarter with occupancy up by 50 basis points to 93.1 percent. Office occupancy was down slightly over the quarter to 88.6 percent, while apartment occupancy fell 60 basis points to 93.5 percent. Net operating income (NOI) growth was 5.1 percent (including hotels) for the trailing year, remaining above its 3.2 percent long-term annual pace. Industrial holds the lead for annual NOI growth, at 8.4 percent, followed by office at 7.9 percent. Annual retail and apartment NOI growth trailed the overall NPI, at 3.8 percent and 0.8 percent, respectively.
Transaction volume for NPI properties totaled $11.8 billion in the third quarter 2017 with 193 properties sold, compared to $9.7 billion for 216 properties during the same quarter a year ago. The implied valuation cap rate was 4.38 percent in the third quarter, down marginally from 4.47 percent last quarter. All property types experienced modest cap rate compression over the quarter and range from 4.16 percent for apartment to 4.79 percent for industrial.
