stream On the other hand, the ODCE weighting to multifamily has increased from 25.1% to 26.5% since 2017, the second highest share overall, given demographic and socioeconomic tailwinds. In the years ahead, there is also likely to be stronger interest in alternative property types. %PDF-1.3 endobj The ODCE weighting to office has also declined from 38.3% to 34.1% since 2017, reflecting portfolio de-risking, as more investors realize that many office buildings are capital intensive and historically more volatile during recessions. The NCREIF numbers capture the returns of 124 senior housing properties valued at $6.5 billion as of the third quarter. y rE izQc>LG"A;QlV6dUIgRuhqf$"Fh@0,\~^"Kqatdtm7|tn>p Returns on investment are required to be reported without leverage. The NCREIF Property Index is a value-weighted index of property returns and as such, a large portion of the index is located in just 20 markets. At a sector level, we expect retail to Capital Economics Ltd Why Invest in REITs This implies cap rates are also near record lows. All Clarion Partners LLC and Clarion Partners Europe statistics, data and charts, including but not limited to assets under management (AUM), ESG data, sector data and property data, as well as data related to our investors, tenants and employees, are as of 12/31/2022 unless otherwise noted. For the same risk management reason, the ODCE hotel weighting has been reduced to zero. Mark-to-market debt valuation also contributed to the recent weak performance of the ODCE Index. core real estate, NCREIF Property Index, listed REITs, FTSE NAREIT Equity REITs . Factors, including valuation declines and increasing investor allocations to other property sectors, have contributed to a decline in the retail sector allocation to only 16% in the ODCE Index. U.S. REITs raised $2.5 billion from secondary debt and equity offerings in the fourth quarter of 2022, down from $8.6 billion raised in Q3. Interestingly, Private Equity's excess returns are actually greatest when Public Equities deliver low returns. Source: NCREIF, Clarion Partners Investment Research, Q1 2020. The NCREIF Property Index reflects the change in prices of commercial real estate for. 9 0 obj Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. The IOC comprises five top researchers who have enough understanding of the member firms databases. The computations are time-weighted as described more fully on the NCREIF web site. Management, Agricultural The NCREIF also prohibits members from joining more than one of the three categories or switching membership to another category. This is normal in real estate, but users need to be careful not to confuse capital appreciation with property appreciation. The NPI covers properties that are acquired in place of institutional investors that are exempted from taxes in the fiduciary environment. Depreciation of Retail. NCREIF Property Index Returns Industrial properties had the lowest Income Return but had the highest appreciation return AGAIN which is near RECORD levels. The NCREIF Property Index provides quarterly and annual total returns for thousands institutional-grade office, retail, apartment, industrial, and hotel properties. Auctions, Land You may already have access to this premium content as part of a paid subscription. APARTMENT: INCOME returns increased driving APPRECIATION RETURNS to record highs. info@PeoplesCompany.com. It was also noted that the 10 Year Treasury rate had decreased during most of 2011-2021. Income returns have been decreasing indicating that FUTURE income increases are anticipated or CAP RATES are decreasing. NEW Home Market for Month Ended: JANUARY 2023, Construction begins on oft-delayed 144-unit housing project in Watsonville, Existing Home Market for Month Ended: JANUARY 2023, Mortgage Rates INCREASED 3bp to 6.35% as of 2.9.23. 1-202-739-9400 US 10 Year Treasury Rate and Rolling 4 Quarter Income Returns have a high correlation. 50325855.800.LAND With COVID becoming less of a public policy issue, it remains to be seen if the online shopping trend will remain at high levels.. INDUSTRIAL: Returns are THE LARGEST APPRECIATION EVERsince ~1976 NCREIF Index creation. _ Performance remained uneven across property sectors. For example, the property index and other statistical analysis published by the association help investors understand the operations in the real estate investment industry while identifying weaknesses and opportunities that investors can leverage. INDUSTRIAL PROPERTIES as a % of NCREIF: NCREIFs composition by property type gradually changes over time. Because of this composition change, the Total NCREIF return is higher due to record-shattering returns posted by industrial properties. IN A NUTSHELL _ U.S. core real estate, as measured by the NCREIF Property Index (NPI), registered unlevered total returns of 2.6% (trailing four quarters) in the first quarter of 2021. A recent example is the 12 months ending in Q3 2021, when annual real GDP growth and inflation rates were 4.9% and 5.4%, respectively, but the NCREIF Property Index posted a healthy annual rate of . endobj On the other hand, mall owners face significant challenges in how to transform tenant mix and boost foot traffic, which would require an enormous amount of CAPEX. msU-?WMTYV_~|W\o%U'S[X|6zD^?VI~iOofx.4zqWV,g|:2*/s>#BF*?~,7Rb^l VNl.+^6D)m6(q[,YX>@a}7Kk'eTeM]W2&IP{WSP}YCK^:J8=( Z2]GH`Y+C_>c"+MPwe;mafnvjTmd.j'r7U7e9:{ed!6L00e61^aa Reporting Schedule and Access: The NPI is published roughly four weeks following the end of each quarter. Chicago Teachers' Pension Fund 5 U.S. In the third quarter of 2022, the FTSE Nareit All Equity Index and NCREIF Fund IndexOpen End Diversified Core Equity posted rolling four-quarter total returns of -16.3% and 22.1%, respectively. Hotels tend to be highly volatile during economic downturns, and most investors do not consider hotelsa core investment at all. Brad Case is senior vice president, research & industry information for the National Association of Real Estate Investment Trusts (NAREIT). Private U.S. Real Estate Income Consumer Price Index 0% 2% 4% . The Index Oversight Committee (IOC) is tasked with the responsibility of upholding integrity in the board of directors by recommending changes, where necessary. Because it takes a long time to complete an appraisal, the NPI suffers from, Because independent appraisals are expensive, typically theyre done infrequentlyonce a year or even once every three yearswith internal updating between external appraisals. The U.S. commercial real estate market is amid an uncoupling. The relationship between returns on the asset and returns on the equity invested is: %RoA = [%RoE + %WACD * %L/(1-%L)] / [1 + %L/(1-%L)] where %WACD is the weighted average cost of debt and %L is leverage measured as debt divided by asset value. 3 0 obj The validation is a two-step process. & The rolling annual return for the past four quarters was 21.87 percent, which is the highest since the first quarter of 1980 and the second-highest in the 44-year history of the NPI. On March 16th, 2022 the Federal Reserve clearly stated that interest rates would be increasing. In the third quarter of 2022, the FTSE Nareit All Equity Index and NCREIF Fund Index-Open End Diversified Core Equity posted rolling four-quarter total returns of -16.3% and 22.1%, respectively; a difference of -38.4%. Within the ODCE, Industrial continues to be the best performing sector, having outperformed all others since 2016, with a rolling one-year return (as of 3Q20) of 10.1 %, followed by office at 2.8%, apartments at 2.3%, and retail at -6.3%. That's good, but it underperforms in comparison to commercial real estate. endobj REITs underperformed broader markets in 2022, as the FTSE Nareit All Equity REITs Index posted a total return of -24.9% and the FTSE Nareit Equity REITs Index returned -24.4%. RETAIL: As INCOME returns have slowly increased, appreciation returns have also increased. Income returns bottom out in Q4 2020 when record-low mortgage occurred and have risen since. Considerable disparities Performance histories began in 1978. Clarion Partners believes that the unprecedented monetary and fiscal stimulus programs and the transitory, self-induced nature of the shutdown are factors that will facilitate an economic recovery. You are leaving www.clarionpartners.com and being directed to a new site. He holds patents as the co-inventor of the FTSE NAREIT PureProperty(r) index methodology and the backward-forward trading contract. 2023 Chartered Alternative Investment Analyst Association. << /Type /Page /Parent 7 0 R /Resources 3 0 R /Contents 2 0 R /MediaBox In recent months, however, the global pandemic has led to a rapid downturn of the U.S economy, negatively impacting different industries and real estate dynamics. REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. These are the characteristics of real estate investment. . o Capital appreciation is NET of capital expenditures on the property: that is, it is equal to the change in the value of the property minus capital expenditures. The first group comprises data contributing members, which consist of institutional investment managers that oversee real estate investments with a market value above $50 million. Income return have been slowly increasing as property appreciation has modestly increased. CORE FUND MANAGERS REBALANCE CRE PORTFOLIOS, Allocations to multifamily will increase, and office should drift lower gradually; and. Nareitis the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate and capital markets. Industrial income return is at its LOWEST LEVEL EVER. For a property to be included in an NPI, it should fulfill the set-out requirements. Seniors housing returns compare favorably to this overall index, with an 11.6% annualized investment return over the same period. This generated an extensive debate within the real estate industry about the true risk and return profile of commercial property. Would you like to have your piece featured on the Portfolio For the Future blog? In its second quarter results, NCREIF reports the total return for the second quarter was 1.47%, up from 0.86% the. The red dashed line is the projected 10 Year Treasury rate through the end of 2022 (shown in the graph below). In fact, equity REIT returns more closely resembled the broader stock market than they did the NCREIF Property Index. x][s~_Jlk+U~H %kvCM-;Tb9s/p1MVP?btb]?7 Glossary, videos, podcasts, research in the Resource Center. American Society of Farm Managers and Rural Appraisers, Inc. 720 South Colorado Boulevard, Suite 360-S. Glendale, CO 80246-2664 (303) 758-3513. With rising 10 Year Treasury rates, whether the lower cap rates can be maintained is subject to debate. The 24 large open-ended core property funds in the US, that make up the $262bn (240bn) NCREIF Open-end Diversified Core Equity (ODCE) index, had a fairly benign year in 2019, posting a 5.34% annual return. Become a CAIA Charterholder today. The second group is heavily involved in various areas of the real estate industry, even though they may not own any assets under management. Actinspace. Thus, for the return during 3 The current NCREIF formulas for income and capital return are "accounting-based." In this article, The NCREIF Property Index originated from the United States and is predominantly used to quantify the variation in institutional investors' real estate properties. Hotel real estate investors need to measure both the absolute and relative financial performance of their properties. The National Council of Real Estate Investment Fiduciaries (NCREIF) has released first quarter 2022 results for the NCREIF Property Index (NPI). Industry data and research highlights the investment performance benefits and opportunities of REIT-based real estate investments to institutional and individual investors, financial advisers, policymakers and the media. 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