Leveraging his work and tapping data from the National Council of Real Estate Investment Fiduciaries (NCREIF), Dr. Jeffrey Fisher provided his most recent insight into commercial real estate market conditions during the RealNex Webinar Series on May 14, 2019. The outlook was based on data at the end of the First Quarter of 2019.
While the full session recording and presentation deck are attached, key findings of the research were:
- NCREIF Property Index (NPI) Returns were up for the Quarter
- Industrial still the top performing asset class
- Retail demonstrated an uptick
- Cap Rates hit another all-time low
- Occupancy off slightly but remain near record levels
For Q1 unlevered property returns were at 1.8%. Levered properties realized a 2.1% return. While these returns were far below those for the S&P and NAREIT indices, they have demonstrated far less volatility quarter-over-quarter. The most volatility was seen in retail due to repricing of super regional malls. Based on this adjustment the retail sector jumped from a negative .5% in Q4 2018 to a positive 1.6% in Q1. Industrial continued to lead the pack with quarterly returns approaching 3.0% unlevered. Overall, returns have largely been driven by increasing NOI and cash yield and can no longer count on significant cap rate compression to support value gains. Even at these historically low levels cap rates did drop slightly further adding to property value gains. When looked at against the past 15 years total returns were generally at a median level across virtually every market
Arguing for cap rates to remain at low levels is the correlation to longer term BAA Bonds and the relatively high level of the current US risk free rate versus other global markets. Nonetheless even if cap rates do move up slightly, any negative impact is expected to be offset by even stronger gains in NOI and cash yields.
From a capital standpoint, real estate continues to be in high demand with fund flows remaining steady at high levels and considerable “dry powder” yet to be deployed.
When polled during the call the audience was optimistic about the market projecting there was still room to run, although expectations were for a near term market peak. Over 51% expected the NCREIF Index to be the top performing index in 2019 although 62% expected the market to peak by year-end. The major concerns for the market are not supply and demand but rather political issues that could shock the market and negatively impact the economy.
Please click the link to access the recording and deck.