“Never seen anything like this in the history of the Index,” commented Dr. Jeffrey Fisher during his RealNex Webinar Series presentation on CRE Market Trends. Discussing his findings based on Q3 2021 research, Dr. Fisher noted the staggering 11% quarterly returns for Industrial property. And, while that sector continues to be white-hot, Apartments at 6.5% quarterly would have normally been something to get excited about!
After a brief Covid-19 induced blip negative in Q2 2020, the NCREIF Property Index has marched steadily higher quarter over quarter to a new 15-year peak in Q3 2021. The Market Value Index has also reached a new peak at nearly 500 from the 1978 benchmark of 100. With prices in rarified air, institutional transaction activity has moved towards the high end of its range at close to 200. Both investment and lending activity are at record levels.
The NCREIF Property Index was up across the board, led by Industrial and Apartments. It was weighed down slightly by small 2% gains in Office, Retail and Hotels. The Industrial market continues to be bolstered by the macro, on-line shopping trends and seems to be further amplified by supply-chain disruptions which are forcing a change in just-in-time delivery and on-shoring strategies. Referencing Dr. Glenn Mueller’s Market Cycle Index, Fisher noted all sectors except B and C Malls were in positive market cycles.
When polled, the audience expected current market trends to continue through year-end, with 66% expecting Industrial to be the top performing sector followed by Apartments with 31% of the vote.
Pension Real Estate Association (PREA) forecasts 2021 to end with total returns of 14%, lead by Industrial at 30.8% and Apartments at 15.3%, while weighed down by Retail at 2.5% and Office at 5%. With occupancy rates solid among all institutional asset classes, PREA expects 2022 and 2023 to be more tempered at 8.7%, with Industrial cooling to a still strong 13.8% and Apartments to 10.6%.
Citing work from Greg McKinnon on the impact of inflation, Dr. Fisher was optimistic that even if the current inflation rate is more than “transitory”, the impact on commercial real estate will not be harmful. Indeed, Mckinnon’s research suggests that commercial real estate performs well in any inflation scenario provided GDP is growing. The faster GDP grows, the better CRE performs. In fact, as an outlier, CRE tends to outperform in slow growth GDP environments with a mid-level increase in inflation.
Given the current environment, it was not surprising to see that cap rates continue to compress, inching ever closer to 4%. The audience was fairly divided on expectations for 2022, with 17% expecting a drop below 4.0%, 45% expecting stability in the 4-4.5% range, 24% expecting 4.5-5% and 14% anticipating a jump to above 5%.
Similarly, the audience was mixed on forward looking values with 37% expecting gains, 15% losses, 30% flattening and 19% with No Idea.
Fisher summed up his remarks with a “'tis the season to be jolly” sentiment:
- National Returns at 15-year high
- Price levels at record levels
- Industrial breaking all kinds of records
- Transactions back to normal range
- Cap rate compression is still alive