Occupancy at Record Highs, Cap Rates at Century Lows…Where do we go From Here?
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Thursday November 15, 2018 In our ongoing series of quarterly Commercial Real Estate Pricing Trends RealNex Head of Data and Research Jeffrey Fisher Ph.D presented his findings and analysis based on the latest survey results of the National Council of Real Estate Fiduciaries(NCREIF). The NCREIF Survey is conducted quarterly and includes key performance metrics from the over 10,000 properties valued in excess of ½ trillion dollars owned by private institutional investment funds. Highlights from the most recent survey:
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Institutional Investors surveyed don’t expect any change in returns in the near term. While cap rates have continued to fall, they are not expected to go lower. NOI growth is anticipated to offset any likely rise in cap rates to protect asset values and overall returns. For the most quarter unlevered returns ran at 1.7% or 7.1% annually. Levered returns were at 1.9% for the quarter and 8.3% annually. Based on repeat sales data from Real Capital Analytics overall prices increased 7.2% year-over-year, with apartment increasing the most and retail the least.
The Real Estate Income Yield spread to Baa bonds was slightly negative at about 25bp, suggesting property is priced to perfection. There is room to run with interest rates rising before cap rates follow. Spreads peaked at 200bp over in 2002 and troughed at 300 bp under in 2008.
Investor appetite for property remains steady with net inflows into funds virtually matching outflows into open end funds. The most transactions were found in the apartment and industrial sectors while the greatest amount of capital was deployed in the office market. However, there has been a net withdraw of capital going into Closed End Value Add Funds.
Noteworthy of major markets the top performing industrial markets were all on the west coast with Los Angeles, Riverside and Seattle leading the pack. On the other hand, New York City was the biggest drag to overall returns in the office and apartment sector. Chicago held that honor for retail. Vacancy rates were down across the board, with industrial market remaining the tightest at nearly 3% and office showing the most space available at 11.2%. Retail and Apartments matched the overall market level hovering at 6%
To gain a perspective of the future outlook, during the webinar we conducted 4 surveys of the audience to gauge the “real-time” market perspective.
- When will the market Peak for this cycle?
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Peaked This Quarter |
18% |
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Next Quarter |
12% |
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2019 |
45% |
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2020 or later |
25% |
- What will be the best performing property sector in 2019?
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Apartments |
21% |
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Hotel |
5% |
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Industrial |
64% |
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Office |
7% |
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Retail |
2% |
- What will overall cap rates be at the at the end of 2019 (Current rate is 4.5%)?
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Below 4% |
0 |
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4%-5% |
28% |
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5%-6% |
52% |
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Above 6% |
20% |
- What do think Total Returns will be 2019?
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Below 5% |
7% |
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5%-7% |
53% |
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7%-9% |
38% |
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9%+ |
2% |
Based on the quarterly findings and the market survey, we appear to be in the 9thinning of this long bull market run for commercial real estate. While we could go into extra innings, even the end of the run is still expected to play out in a mild cyclical leveling rather than a precipitous decline.
Click the link to access the presentation deck and recording.
