NCREIF Property Index decreases in third quarter

The NCREIF Property Index (NPI) posted a total return of 1.67 percent in the third quarter, down slightly from 1.81 percent last quarter. This is an unleveraged return for what is primarily “core” real estate held by institutional investors throughout the United States.

The index reflects investment performance for 7,786 commercial properties, totaling $592 billion of market value, according to NCREIF.

The average quarterly return over the past five years was 2.33 percent, or 9.65 percent annualized.  Although the current quarter’s return of 1.67 percent, or 6.86 percent annualized, is down from the torrid pace during the previous five years, the downward drop in returns witnessed for several years stopped at the beginning of 2017 and returns have held remarkably steady since then.

The third quarter 2018 total return consisted of a 1.11 percent income return and 0.56 percent capital appreciation. 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.

Industrial properties, which are primarily warehouse, continue to be the stellar performer with a return of 3.36 percent for the quarter. Hotel followed closely with a return of 3.22 percent. Office was third highest at 1.69 percent, followed closely by apartment at 1.55 percent. Retail was again in last place at 0.56 percent.

Occupancy for NCREIF-tracked properties rose to 94.17 percent, which is the highest since the fourth quarter of 2000. The highest occupancy was for industrial properties at 96.94 percent. At the same time, cap rates declined to the lowest level in the entire history of the NCREIF Property Index, which started in the first quarter of 1978. Cap rates dropped to 4.32 percent, which represents the blended rate at which the portfolio of all NPI properties were being valued.

Despite the 18-year high in occupancy, rent growth slowed for the quarter to about 0.7 percent compared with 1.54 percent last quarter.