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CRE Market Update Q3 2020 – Has the CRE Market Stabilized?

Posted by Jeff Finn on Nov 16, 2020 8:00:00 AM

Based on research of Q3 2020 data, RealNex head of data and research Dr. Jeffrey Fisher presented his analysis and findings in a webinar last week. Dr. Fisher was joined in this quarter’s webinar by Terry Tallen, Chairman and CEO of Tallen Capital. Given his ownership of a diverse portfolio of retail assets, Terry was able to provide particular insight into real time activity in that sector.

At the macro level, markets improved considerably quarter over quarter. While returns had dropped -.75% in Q2, they recovered to a positive 1.0% in Q3. The question remains is the bounce a start of a V-shaped recovery or a short-term bounce reflective of the pent-up demand, return to work and PPP funding propping up the market. While too soon to tell, the move was positive and there was optimism among the audience that stabilization and improvement will continue.

The overall return was supported by a 2% gain in property values as tracked by the NCREIF Property Index (NPI). While NOI was off, the perception that the decline would be short lived resulted in a further drop in cap rates to buoy asset values.

Among core asset classes Industrial continues to strongest and retail the weakest. But the experts suggested to not count retail out. Over the long term, it had been a top performer in the 1980’s and once again in the 2000’s even after it was the laggard in 1990’s. Industrial and apartments had implied discount rates of 6.1% – 6.2%, while retail was at 6.9%. Cap rates continue to drop into the overall range of 4.5%, yet Baa bonds dropped even more resulting in an increased spread. Cap rates for Apartments dropped from 4.3% to 3.8% - perhaps an anomaly factored by a 9% drop in NOI and 2% drop in values. Once again, the notion that NOI declines would be temporary are reflected in these numbers.

Another positive sign was seen in rent growth. After a quarter negatives, all types were near the flat line. And NOI growth recovered sharply across the board, with retail reverting from a -30.45% quarter to a virtually flat -.68%. But not all retail is created equal as Terry Tallen pointed out. With necessity-based Grocery and Drug anchored community and neighborhood centers faring well and single tenant/power centers performing poorly. Standout winners included, Costco, Walmart, Target, CVS and drive through restaurants like In-and-Out Burger and Chik-Fil-A while losers included the likes of Health Clubs, Movie Theatres, and sit-down/buffet style restaurants among a host on bankrupt department stores, clothiers and general merchandisers. To weather the storm retail property owners have been active restructuring leases. Not only have these leases typically resulted in a constant economic value, terms have often been improved to increase long term asset value.

Transactional activity remains at rough level. Although after spiking down to just 30 trades in Q2 the pace picked up slightly 50 sales in Q3. Far off the recent peak of 300 but still better than the 2009 low of 25. With capital still flowing and ready to be deployed in the market, liquidity and activity is expected to continue the bounce back toward equilibrium.

Dr. Fisher summed up the findings as follows:

  • National returns turn positive
  • Primarily due to the continued strong performance of industrial warehouse
  • Retail continues to be worst performing sector – but returns up from last quarter
  • Transactions up slightly but still second lowest level since financial crisis
  • Less write-downs and more write-ups than last quarter
  • Cap rates and market values holding steady


In addition to his data, Dr. Fisher polled the audience along the way to gather their market-based perspective. Here are the results of those polls.


What will the annual NPI (institutional investor) unleveraged return be for the year 2020? (We are currently just slightly positive for the first three quarters.)

A. Below negative 1%


B. Negative 1% to 0%


C. 0% to 1%


D. 1% to 2%


E.  Above 2%



What do you think will be the change in market values during the next (4th) quarter?

A. Drop 1% or more


B. Drop between 0% and 1%


C. Increase between 0% and 1%


D. Increase more than 1%



What will cap rates be for the nation by the end of 2020?

A. Below 4%


B. 4% to 4.5%


C. 4.5% to 5%


D. Above 5%



What Property Sector do you think will perform best in 2021?

A. Apartment


B. Hotel


C. Industrial


D. Office


E. Retail



What do you think is the most likely direction of the market over the next 4 quarters?

A. Returns will turn negative again and values will decline


B. Returns and values will probably bounce around the current level


C. Returns will continue to increase, and values will rise


D. I have no idea!



Click the links to watch a replay of the presentation or access a copy of the presentation deck.

Topics: RealNex Webinar Series

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