During his November 21, 2019 presentation on the RealNex Webinar Series, Dr. Jeffrey Fisher presented his research findings on commercial real estate market pricing trends and conditions. Based on his research and work in conjunction with The National Association of Commercial Real Estate Investment Fiduciaries (NCREIF), Dr. Fisher reports that markets remain strong with no signs of a turn even at current peak levels.
During Q3 all property types, even the challenged retail sector, showed positive results. Continuing to be led by the hot industrial sector, the overall pricing index touched a new record high. Cap rates and vacancy rates remain at historic lows with no signs of abating.
The NCRIEF Property Index (NPI) showed a levered return of 1.6% for the quarter and 7.0% for the year. This compares to the REIT index which rode the stock market recovery to achieve quarterly returns of 7.7% and 20.7% for the year. While over time, these two indexes general perform at roughly the same level, the REIT Index carries some additional volatility generated by the stock market. Over the recent past the NPI has been running at roughly 2% per quarter and is expected to continue apace. However, the strong performance is not expected to be supported by additional cap rate compression, even though from a global perspective USA cap rates are still high. Growth in the Index is expected to be fueled more by improvements in Cash Flow and NOI.
At 3.2%, the Industrial Market enjoyed strongest quarterly return by far. Outpacing the 1.4% for the office sector, 1.2% for apartments and the meager .2% in the retail market. While tightly banded through 2016, returns continue to be increasingly divergent by sector. Returns have also begun to vary meaningfully by region with the West Coast remaining Hot and the Northeast not so much. In aggregate the NPI reached a new high-water mark approaching 390 vs. the 1979 benchmark of 100. Even at these lofty levels institutional investors remain Bullish and don’t see a peak in the coming year.
For non-Institutional assets Cap Rate spreads actually look high relative to 10-year treasuries. Spreads exploded to 597 bp in the depths of the great recession in 2012 after reaching a trough of 199 bp at the peak of the 2006/2007 boom. They now hold at 461 bp. For institutional assets they peaked at 450 bp, troughed at 50 bp and are now at 300 bp. Belief that interest rates are artificially low have kept the spread above the long-term rate of 200 bp. Cap rates continue to closely track BAA bonds a trend that is expected to continue.
Acquisition volume from all sources remains solid, but not at a peak level. Demand is strong among Cross Border, Institutional and Private investors. Foreign investment is led by Canada and is largely focused on industrial property. Interestingly virtually all acquisitions from China were for industrial assets, while Germans maintained their historically strong appetite for office space.
Further fueling the solid market performance is the lack of over building and the solid demand for space. Occupancy levels are at record levels in the 90% range. Industrial is extremely tight with just a 3% vacancy, while office is just over 10%. The weight of capital seeking yield and the solid fundamentals bode well for continued solid and steady performance well into 2020.