After dropping each quarter during 2015 and 2016, rates of return for commercial real estate held by the nations large institutional investors has leveled off over the past three quarters. Furthermore, the lower returns have only meant that returns are just back to or at slightly lower returns than a long term average.
We have heard a lot in recent years about so-called “big data.” Having spent my career doing research and creating products using data, I was intrigued to learn more about how big data might be used for commercial real estate.
Although the rate of price appreciation has moderated the past two years, it has still been positive and values have continued to reach new highs for commercial real estate as measured by the NCREIF Market Value Index (MVI). NCREIF tracks the performance of over $500 billion in commercial real estate owned by institutional investors in the US and includes all the major property types (apartment, office, industrial, retail and hotel). The following graph shows the quarterly value indexed at 100 in the first quarter of 1978. The value is also above a long-term trend line shown in the graph.
Sam Zell (pictured left) recently stated: “The real estate cycle is nearing its end” (Pensions & Investments, May 1, 2017). We must admit that Sam had great timing when he sold his Equity Office REIT to Blackstone in 2007 which was the peak of the last cycle.