During the RealNex Q2 2019 Commercial Real Estate Market update, Dr. Jeffrey Fisher reported on his findings based on research conducted with National Council of Real Estate Investment Fiduciaries (NCREIF). The presentation was part of the ongoing RealNex Webinar Series hosted by CEO Jeffrey Finn. The NCREIF data is reported quarterly and includes key metrics of property level performance for over 10,000 properties valued at in excess of $500,000,000.
Returns for all property types except retail were up for the quarter with industrial was once again the best preforming asset class. With cap rates continuing to decline and occupancy levels near all-time highs, the Market Value Index set a new peak level.
Even with the new record levels, overall property level returns are on target for 6.5% total return this year, well off the long-term rate of 9.3% - 9.4% which has been enjoyed over the past 10 and 25 years respectively. These rates of return compare to the S&P which grew at a 10% annual rate over the past 25 years, and 14.7% over the past 10. This more liquid stock market return also enabled REITS to outperform property with a 10.4% growth rate over 25 years, 16% this past decade and 12.6% in the past year.
Nonetheless, when surveyed, the RealNex audience believed that property would be the top performing asset class for the remainder of 2019. 33% felt the NCREIF index would be on top, followed by 20% for S&P, 18% for Bonds and 16% for NAREIT. Only 13% thought Farm and Timberland would be best performing.
While overall property returns are expected to be in the 6.5% range this year, the market is mixed with industrial on pace for 14%, retail under 2% while office and apartments are tightly banded around the 6.5% index rate. Even while retail real estate returns were poor, the sector has improved with retail sales up and bankruptcy related closures down, resulting in improved occupancy levels.
Looking forward the audience believed overall returns would continue to decline, with only 23% expecting returns to stay above 6%. 45% felt rates would be in the 5-6% range, 28% in the 4-5% range and 4% thought they would drop below 4%.
From a flow of capital perspective, the market is in balance with virtually the same amount coming into the market as being taken out. Funds continue to be net buyers at $5 billion, well off the pre-bubble peak of $60 billion and post bubble peak of $30 billion.
Foreign investors, particularly Canadian, continue to be active in the market, but far from the peak. In Q2 Foreign Investors poured $11 billion into the US property down from $35 billion in Q1 2015. Over 80% of this capital flooded into the top 15 markets led by New York City, Los Angeles and San Francisco.
Cap rates, acting immune to moves in short term Fed Funds, continue to move in lock step with BAA bonds and are setting new lows in the 4.5% range. Interestingly all property types are tightly banded around this level, with industrial and retail at 4.6%, office at 4.3% and apartments at 4.2%.
58% of RealNex survey respondents felt cap rates would stay in the 4.5-5% range through the end of 2019, with 23% thinking they would decline to under 4.5% and 19% believing they would exceed 5%.
So, with record high occupancy levels and record low cap rates, when asked if the market had peaked or was peaking, the audience indicated further optimism. Only 10% thought we had just peaked and another 10% believed we were about to peak in the coming quarter. 19% saw a peak coming by year-end 2019, but 62% see markets continuing to rise into 2020. The group feels industrial and apartments will continue to lead the way as solid NOI growth bolsters value gains.
Please click below to access the webinar recording and presentation deck.