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Markets remain in balance even at new peak levels

During the RealNex Webinar February 14, 2019, Dr. Jeffrey Fisher, Head of Research and Data, presented findings from his research and analysis of data provided by the National Association of Commercial Real Estate Fiduciaries (NCREIF).

After a decade of steady gains, commercial real estate markets continue to remain strong but are showing signs of a peak or at least a plateau. Highlights of the findings from fourth quarter 2018 market performance, include:

  • Returns were down slightly
  • Values moderately up
  • Occupancy ticked down
  • Cap rates steady
  • Industrial strong; retail weakening

There was a major disconnect between REITs and actual property level performance. While stock market volatility brought the NAREIT Index down -6.1%, the NCREIF Property Index remained positive at 1.4%. With cap rate compression no longer fueling outsized gains, the NPI is now driven by NOI growth. Cap rates continue to closely track Baa bonds, but this quarter fell below the benchmark.

Capital allocation to real estate remains very healthy with flows in and out of funds in balance at about 2% in each direction. Given the larger levels of inflows over the past decade, funds maintain a considerable amount of “Dry Powder” and continue to seek opportunities as they come to market.

Markets remain in balance without the typical overbuilding at this stage of a cycle. Forecasts remain strong for a balance in supply in demand in the coming quarters, with industrial markets expected to continue torrid pace while other sectors moderate. The “Amazon” effect of online retailing continues as a megatrend with strong industrial markets sapping demand for retail. As a result, NOI growth for industrial properties grew by 3.4% while retail dropped by -.4%, with other sectors grouped tightly around 1.5%.

Several surveys were conducted during the call to gather the pulse beat of the market. The results indicated market sentiment that:

  • Commercial Property would outperform other asset classes in 2019
  • Overall returns are expected to be in 5-6% range
  • Cap Rates are expected to increase slightly into the 5-6% range
  • Industrial property would be the top performing asset class
  • Commercial property markets have yet to reach a cyclical peak, but are expected to in 2019

Survey Results

What will be the best performing asset class in 2019?

A. NCREIF Property Returns (leveraged or unleveraged)62%
B. Farmland or Timberland12%
C. S&P 500 Stocks12%
D. Corporate Bonds2%
E. NAREIT Index13%

 

What will the annual NPI total return (unleveraged) be for 2019? (Current annualized quarterly rate just under 6%)

A. Below 4%6%
B. 4%-to-5%31%
C. 5%-to-6%59%
D. Above 6%4%

 

What will institutional cap rates be for the nation by the end of 2019?

A. Below 4%5%
B. 4% to 5%31%
C. 5% to 6%51%
D. Above 6%14%

 

When will market values peak for this cycle?

A. Peaked this quarter13%
B. Next quarter13%
C. Before the end of 201955%
D. 2020 or later19%

 

What will be the best performing property sector in 2019?

A. Apartment7%
B. Hotel2%
C. Industrial90%
D. Office 
E. Retail 

 

What is your biggest concern for 2019 (that could impact CRE)?

A. Fed raising interest rates34%
B. Political stalemate22%
C. Inflation20%
D. Trade protectionism24%

 

To review the full playback of the webinar and access the presentation deck please click the link below.

 Access Recording and Deck

Photography courtesy of: Eric Rothermel

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