CHICAGO — Newly released results for the NCREIF Property Index (NPI) show total returns for the fourth quarter of 2011 were 2.96 percent, comprised of a 1.45 percent income return and a 1.51 percent capital appreciation return. For the year, the NPI returned 14.26 percent, split between 6.11 percent income and 7.80 percent appreciation. The NPI Index tracks approximately $284 billion of institutional real estate investments.
While the NPI returns are down from the previous few quarters, they remain above the 30-year average of 2.1 percent and the 19-year average of 2 percent, according to Jeffrey Havsy, director of research for Chicago-based NCREIF. For the year, the NPI’s nearly 14.3 percent return outperformed both the S&P 500 and NAREIT Index.
Since bottoming at the end of 2009, the NPI total returns have been positive each quarter for the past two years. Prices have rebounded 19 percent since bottoming in the first quarter of 2010. That is slightly more than half of the 29 percent loss that occurred from the peak in the first quarter 2008, to trough.
The economic uncertainty of late summer continued into the fall, with questions about Europe and the strength of the U.S. recovery, explained Havsy. The fears of an economic downturn did not hurt the stock market during the fourth quarter, with the S&P 500 returning over 11 percent and NAREIT Index up more than 15 percent. Both of those segments bounced back from negative mid-teen returns in the third quarter.
That is in contrast to private real estate, which saw a slowdown in appreciation during the fourth quarter. Appreciation in the NPI has diminished in each of the past two quarters, but returns have remained positive.
The slowdown in appreciation in the NPI Index reflects some of the uncertainty in the market regarding core pricing and future growth in fundamentals. After falling to 5.8 percent last quarter, capitalization rates rose to 6 percent in the fourth quarter. The pause in pricing did allow some of the fundamentals to “catch up” to the capital markets, said Havsy. Occupancy continued to rise, climbing to 89 percent from 88.7 percent last quarter.
Same-store net operating income (NOI) in the NPI Index grew 1.8 percent after falling in the third quarter. Rising occupancy and NOI bodes well for the future health of the market, emphasized Havsy. Apartments and retail drove the increase in NOI, while industrial and retail led the improvement in occupancy.
For the second consecutive quarter and the third time in the past five quarters, apartments were the best performing sector. Retail was a close second again with a total return of 3.37 percent, nine basis points behind apartment’s 3.48 percent. (See chart.)
Courtesy of NCREIF
Super-regional malls were the best performing sub-type in the quarter. Hotels were the laggard for the quarter and the year with total returns of 2.08 percent and 11.79 percent, respectively.
Regionally, the South was strongest in the fourth quarter with a 3.13 percent total return and the West was the best performing region for the year at 15.96 percent. Within the divisions, the Pacific was the strong annually at 16.61 percent.
Industrial saw the greatest increase in the number of properties, and its index weighting increased from 13.8 percent to 14.3 percent. Retail’s weighting fell from 22.5 percent to 22 percent.
The NPI consists of 6,865 investment-grade, non-agricultural, income-producing properties consisting of apartments, office, retail, industrial and hotels.
The NPI includes property data covering over 195 metropolitan statistical areas. Within in each property type, data is further stratified by sub-type. This data enhances the ability of institutional investors to price the risk of commercial real estate across the United States.
— Matt Valley