The quarterly NPI total return remains modest, although breaking its eight-quarter downward trend. The total return was 1.75 percent in the second quarter 2017, up from 1.55 percent last quarter, but below the 2.03 percent returned in second quarter 2016. The second quarter 2017 total return consisted of a 1.16 percent income return and 0.59 percent appreciation. Over the past four 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 6.97 percent, consisting of a 4.69 percent income return and 2.20 percent appreciation. For longer-term context, the annualized average total return for the past five years was 10.49 percent and 6.42 percent over the past decade.
Total returns by asset class
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 3,631 NPI properties utilizing leverage, the leveraged total return outpaced the NPI at 2.34 percent in the second quarter 2017 and 9.31 percent for the trailing year.
Industrial continues to lead performance by property type with total returns of 3.07 percent in the second quarter and 12.37 percent for the trailing year. Other NPI property types trail by a wide margin in the second quarter with the hotel total return at 1.76 percent and the remaining property types returning about 1.5 percent each. While hotels had their sixth consecutive quarter of depreciation, they also had the strongest income return for the quarter, at 2.24 percent. Office was in the middle of the pack for the quarter with a 1.58 percent total return on 0.45 percent appreciation, which was its best quarterly capital return in a year. The retail total return, at 1.52 percent, was nearly flat versus 1.56 percent last quarter, although marking a steady deceleration from the 2.17 percent retail return one year ago. Apartment shifted to the lowest performing property type with a 1.45 percent total return on the lowest income return across property types, at 1.10 percent, and 0.35 percent appreciation.
NPI total returns by property type
Occupancy for NCREIF-tracked properties edged lower at midyear, to 92.8 percent. But, occupancy is only 40 basis points below the 16-year high achieved last year. Industrial has the highest occupancy rate, at 95.6 percent, and was the only property type to see occupancy gains over the year. Apartment occupancy, at 93.8 percent, was down 50 bps over the year. Retail and office occupancy saw declines of 70 basis points each to 92.6 percent and 87.7 percent, respectively. 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 7.5 percent, followed by office at 6.7 percent. Annual retail and apartment NOI growth closely tracked the overall NPI.
Transaction volume for NPI properties totaled $7.7 billion in the second quarter 2017 with 150 properties sold, down from $9.0 billion for 164 properties during the same quarter a year ago. The implied valuation cap rate was 4.47 percent in the second quarter, up marginally from 4.44 percent last quarter. By property type, only retail saw quarterly cap rate compression with a 12 basis points decline to 4.45 percent. Office had a 13 basis points increase to 4.42 percent, while apartment and industrial only edged up by a few basis points each, to 4.35 percent and 4.86 percent, respectively.
The NPI reflects investment performance for 7,161 commercial properties, totaling $539.2 billion of market value.