Fourth Quarter 2018 NCREIF Indices Review...Disclaimer Today we will be presenting what we see in...

Fourth Quarter 2018NCREIF Indices Review

February 7, 2018

Panelist Overview

Jeff Fisher

NCREIF Data, Research & Education Consultant

Michael Cohen

VP Advisory Services, CoStar

Victor Calanog

Chief Economist and Senior VP, REIS

Disclaimer

Today we will be presenting what we see in the NCREIF data, trends and changes; all comments about future expectations are the personal views of the speakers and not a reflection of a NCREIF opinion or forecast.

Overview

• NPI return down again for quarter

• But capital return still (slightly) positive; Market Value Index still increased

• Cap rates eek out another all time (for NPI) low

• Occupancy down just slightly from last quarter’s highest since 2001

• Industrial still the leader of the Pack; retail turns negative

• Strong Industrial NOI growth; others small to negative

• Spread to treasuries narrows

4

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

1978 1983 1988 1993 1998 2003 2008 2013 2018

Income Return Appreciation Return Total Return

NPI Returns

Quarterly

Chart: E-002-1901

Forty Plus Years of NPI Returns

1.8% 1.4% 1.5%2.8%

1.0%

-6.1%

-13.5%

8.3%

6.7%7.7%

6.7%

3.4%

-4.4% -4.4%

7.0% 7.5%8.6%

11.2%

3.9%

12.5%13.1%

8.5% 9.0% 9.5%

0.0% 0.0%

12.1% 11.5%

-15%

-10%

-5%

0%

5%

10%

15%

NFI-ODCE NPI NPILevered

Farmland Timberland NAREIT S&P 500

Tota

l Ret

urn

12/31/2018 1-Yr 10-Yr Avg 40-Yr Avg

Total Returns by Asset Class

Chart: E-001-1901

Leveraged

1.2

NCREIF OverviewFourth Quarter 2019 Index Composition

7

NCREIF Property Index

(NPI)

NPI Leveraged Property Index

NFI-ODCE (Fund Index – Gross of

Fees)

Farmland Properties

Timberland Properties

Leverage Unlevered 42% 22% Unlevered Unlevered

Quarterly Return

1.4% 1.2%* 1.2% 2.6% 1.0%

1 Year Return

6.7% 7.2% 8.4% 6.7% 3.4%

*The unleveraged return on this subset was 1.1%

Distribution of Property Sectors for NPI vs Leveraged Subset

Leveraged props have more retail and significantly less industrial resulting in lower unleveraged returns for those properties.

Question

• What will be the best performing asset class in 2019?• A. NCREIF Leveraged Returns

• B. Farmland or Timberland

• C. S&P 500 Stocks

• D. Corporate Bonds

• E. NAREIT Index

9

-32%

-22%

-12%

-2%

8%

18%

1978 1988 1998 2008 2018

Co

mp

on

ents

of

Ret

urn

NPI Property Components of Return

Cash Yield NOI Growth Cap Rate Change Other Effects Total Return

NPI Property Components of ReturnAnnual

Chart: C-004-1901

Question

• What will the annual NPI total return be for 2019? (Current rolling annual return 6.7%)

• A. Below 4%

• B. 4%-to-6%

• C. 6%-to-8%

• D. Above 8%

12

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1993 1996 1999 2002 2005 2008 2011 2014 2017

Cap Rate Cash Rate 90-Day Treasury (Rfr) BAA Yield

Real Estate Pricing

Quarterly

Chart: E-003-1901

3.6%

4.6%

5.6%

6.6%

7.6%

8.6%

9.6%

1978 1983 1988 1993 1998 2003 2008 2013 2018

Ca

p R

ates

NPI Index Apartment Industrial Office Retail

NPI Property Cap Rates by Property Type

Annual

Chart: C-013-1901

Question

• What will cap rates be for the nation by the end of 2019?• A. Below 4%

• B. 4% to 5%

• C. 5% to 6%

• D. Above 6%

15

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

1988 1992 1996 2000 2004 2008 2012 2016

Pe

rce

nt

Sold

Avg

Sal

e P

rice

(M

il)

Avg Sale Price Percent Sold

NPI Transaction Price

Annual

Chart: E-036-1901

17

Prices Still Rising

9-11 and Tech BustRecession

Recession

Question

• When will the Market Value Index (MVI) peak for this cycle?• A. Peaked this quarter

• B. Next quarter

• C. Before the end of 2019

• D. 2020 or later

18

2%

4%

6%

8%

10%

12%

14%

16%

1978 1983 1988 1993 1998 2003 2008 2013 2018

Vac

ancy


NPI Property Vacancy by Property Type

Annual

Chart: C-016-1901

-10%

-5%

0%

5%

10%

2003 2005 2007 2009 2011 2013 2015 2017

NO

I Gro

wth


NPI Property NOI Growth by Property Type

Annual

Chart: C-016-1901

NOI Growth 2018-4

3%

5%

7%

9%

11%

13%

15%

17%

2011 2012 2013 2014 2015 2016 2017 2018

Tota

l Re

turn

s

Apartments Garden Apt Low-Rise Apt Mid-Rise Apt High-Rise Apt

NPI Apartment Property Total Returns by Property Subtype

Annual

Chart: C-035-1901

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-50

0

50

100

150

200

250

300

350

400

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023

Vacan

cy Rate

Un

its

(In

Th

ou

san

ds)

Completions Net Absorption Vacancy Percent

Forecast

National Apartment MarketSupply & Demand Trends

24Source: Reis, Real Estate Solutions by Moody’s Analytics ; Top 50 Primary Apartment Markets

Everything Under Construction Is Expensive

Under Construction Units By Rent Decile

Bottom 10%80%-90%70%-80%60%-70%50%-60%40%-50%30%-40%20%-30%10%-20%Top 10%

Source: CoStar Portfolio Strategy As of 18Q3

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Bottom10%

80%-90%

70%-80%

60%-70%

50%-60%

40%-50%

30%-40%

20%-30%

10%-20%

Top10%

Units Under Construction

Units

Lease Up Challenges At The Top Of The Market

Top 10% Of Rents Vacancy Vs Bottom 90% Of Rents Vacancy

3/31/2000

6/30/2000

9/30/2000

12/31/2000

3/31/2001

6/30/2001

9/30/2001

12/31/2001

3/31/2002

6/30/2002

9/30/2002

12/31/2002

3/31/2003

6/30/2003

9/30/2003

12/31/2003

3/31/2004

6/30/2004

9/30/2004

12/31/2004

3/31/2005

6/30/2005

9/30/2005

12/31/2005

3/31/2006

6/30/2006

9/30/2006

12/31/2006

3/31/2007

6/30/2007

9/30/2007


2%

4%

6%

8%

10%

12%

14%

16%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Top 10% Vacancy Bottom 90% Vacancy

Top 10% Vacancy - Stabilized Bottom 90% Vacancy - Stabilized

Vacancy Level

Workforce Segment Outperforms

Asking Rent Growth By Building Rating (National Index)

2.002.002.002.002.001.001.00

12/31/20013/31/20026/30/20029/30/2002

12/31/20023/31/20036/30/20039/30/2003

12/31/20033/31/20046/30/20049/30/2004

12/31/20043/31/20056/30/20059/30/2005


Note: The National Index is an aggregation of 54 major U.S. markets

(2.5%)

2.1%

3.1%3.6%

1.7%

2.9%

(2.3%)

1.8%

3.1%

4.7%

3.1%3.3%

(2.3%)

1.2%

2.1%

3.8%

3.3%

2.6%

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

5%

6%

2008-09 2010-11 2012-13 2014-15 2016-17 2018

4 & 5 Star 3 Star 1 & 2 Star

Average Annual Rent Growth

Suburban Rent Growth Is Outpacing Downtown Neighborhoods

Y/Y Rent Growth By District Type (National Index)

District

CBD

Secondary Core

Prime Suburban

Suburban

Urban

CBD

Secondary Core

Prime Suburban

Suburban

Urban

1

2

3

4

5



3.5%

3.1%

2.7%

1.9%1.7%

3.4%

2.6%2.4%

1.4% 1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Suburban Prime Suburban Urban Secondary Core CBD

Y/Y Rent Growth

18Q4 17Q4

Top and Bottom Apartment MarketsEffective Revenue Per Unit, Percent Change 2017Q3 – 2018Q3

Source: Reis, Real Estate Solutions by Moody’s Analytics

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 2017 2018

Tota

l Ret

urn

s

Office CBD Off Suburban Off

NPI Office Property Total Returns by Property Subtype

Annual

Chart: C-125-1901

0%

3%

6%

9%

12%

15%

18%

21%

24%

-120

-80

-40

0

40

80

120

160

200

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023

Vacan

cy Rate

Squ

are

Fee

t (I

n M

illio

ns)


Forecast

National Office MarketSupply & Demand Trends

31Source: Reis, Real Estate Solutions by Moody’s Analytics ; Top 50 Primary Office Markets

Development Lower This Cycle, But Speculative Construction Increasing

National Index Office RBA Under Construction

For ChartQuarter

12/31/20063/31/20076/30/20079/30/2007

12/31/20073/31/20086/30/20089/30/2008

12/31/20083/31/20096/30/20099/30/2009

12/31/20093/31/20106/30/20109/30/2010

12/31/20103/31/20116/30/20119/30/2011

12/31/20113/31/20126/30/20129/30/2012

12/31/20123/31/20136/30/2013



20%

25%

30%

35%

40%

45%

0

20

40

60

80

100

120

140

160

180

200

07

Q1

07

Q3

08

Q1

08

Q3

09

Q1

09

Q3

10

Q1

10

Q3

11

Q1

11

Q3

12

Q1

12

Q3

13

Q1

13

Q3

14

Q1

14

Q3

15

Q1

15

Q3

16

Q1

16

Q3

17

Q1

17

Q3

18

Q1

18

Q3

Under Construction Committed Under Construction Available Percent Available

(% Available)RBA Under Construction (MSF)

The Flight To Quality Is Widespread

Office Net Absorption By Building Quality (Last 4-Quarters)

Include?

1

1

1

1

1

1

1

1

1

2

3

4

5

6

7

8

9


(2)

0

2

4

6

8

Ne

w Y

ork

Da

llas -

FW

Sea

ttle

San

Jo

se

De

nver

Bosto

n

Washin

gto

n, D

.C.

Ch

arlo

tte

Ch

icag

o

Lo

s A

ngele

s

Atlan

ta

Austin

De

tro

it

Na

shvill

e

Ho

usto

n

East

Bay

San

Die

go

Mia

mi

1 & 2 Star 3 Star 4 & 5 Star Net Absorption

Net Absorption (Million SF)

Leaving Tenants With Limited Options For New Space

National Index Vacant SF Of Office Buildings Built In Last 10 Years

0203040506070809101112131415161718

17Q4

Sources: CoStar Portfolio Strategy As of 18Q4


8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

70

90

110

130

150

170

190

210

230

250

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Vacant SF Vacant SF Average Vacancy Rate

Vacant SF (Millions) Vacancy Rate

020304050607080910111213141516171819 YTD

17Q4

Sources: CoStar Portfolio Strategy As of 18Q4


Asking Rent Rent Premium For New Buildings

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

$20

$22

$24

$26

$28

$30

$32

$34

$36

$38

$40

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Properties Less Than 10 Years Old Properties Greater Than 10 Years Old

Rent Premium For New Buildings

Shortage Of New Space Accelerating Rent Premium

National Index Asking Rents By Building Age

Top and Bottom Office MarketsEffective Revenue Per Square Foot, Percent Change 2017Q3 – 2018Q3


-2%

3%

8%

13%

18%

2011 2012 2013 2014 2015 2016 2017 2018

Tota

l Ret

urn

s

Retail Mall Retail Strip Retail Other

NPI Retail Property Total Returns by Property Subtype

Annual

Chart: C-170-1901

5%

6%

7%

8%

9%

10%

11%

12%

13%

-30

-15

0

15

30

45

60

75

90

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023

Vacan

cy Rate

Squ

are

Fee

t (i

n M

illio

ns)


Forecast

National Retail MarketSupply & Demand Trends

38Source: Reis, Real Estate Solutions by Moody’s Analytics ; Top 50 Primary Retail Markets

2018 Announcements Set New Record

Announced Store Closures By Square Feet

Sources: Business Insider; Clark Howard; ICSC; SEC Filings; RIS; CoStar Portfolio Strategy As of Nov. 2018

87 MSF

76 MSF

102 MSF

147 MSF

0

25

50

75

100

125

150

2008 2016 2017 2018

Q1 Q2 Q3 Q4

Retail Space Announced For Closure (MSF)

“Shrink To Grow” Having Some Impact

Real Buying Power Per SF And Public Retailer Productivity

Sources: U.S. Census Bureau; Moody's Analytics; CoStar Portfolio Strategy As of 18Q2

*Median Household Income times # of Households

All figures in 2017 dollars

$275

$300

$325

$350

$375

$400

$425

$450

$475

$400

$425

$450

$475

$500

$525

$550

$575

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Real Buying Power*/SF Real Public Retailer Sales/SF

Buying Power*/SF Public Retailer Sales/SF

Necessity-Based And Experiential Retail Are The Major Sources Of Demand

SF Leased In Smaller Center Types: 2007-08 vs 2017-18

Apparel

General Retail

Health & Beauty

Fitness & Sporting Goods

Service

Entertainment

Drug/Grocery

Discounter

Restaurant

Fast Food

Other Food

Grocery

Movie Theater

Necessity-Based

Experiential

Total

Pharmacy

Apparel

General Retail

Necessity-Based

Experiential

Fitness & Sporting Goods


*Necessity-Based includes services & grocery. Experiential includes fitness, health/beauty and restaurant.

2007 2017 - Present

(20%)

0%

20%

40%

60%

80%

100%

120%

Apparel General Retail Necessity-Based Experiential

Change In SF Leased (2007-2018)

High LQS Scores Commanding A Premium

Pricing and Cap Rates By LQS, 2017-18 Vs. Prerecession Peak

Sources: CoStar Portfolio Strategy; Census Bureau; Neustar As of Nov-18

0 20 40 60 80 100

$0

$100

$200

$300

$400

$500

2005-06 trend

Avg. Price/SF

Location Quality Score

2017-18 trend

Top and Bottom Retail MarketsEffective Revenue Per Square Foot, Percent Change 2017Q3 – 2018Q3


4%

6%

8%

10%

12%

14%

16%

18%

2011 2012 2013 2014 2015 2016 2017 2018

Tota

l Ret

urn

s

Industrial Warehouse R&D/Flex Manufacturing

NPI Industrial Property Total Returns by Property Subtype

Annual

Chart: C-080-1901

5%

6%

7%

8%

9%

10%

11%

12%

13%

-200

-100

0

100

200

300

400

500

600

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023

Vacan

cy Rate

Squ

are

Fee

t (i

n M

illio

ns)


Forecast

National Industrial MarketSupply & Demand Trends

45Source: Reis, Real Estate Solutions by Moody’s Analytics ; Top Industrial Markets

Construction Is Back In Full ForceBTS And Spec Bulk-Regional RBA Under Construction

12/31/20083/31/20096/30/20099/30/2009

12/31/20093/31/20106/30/20109/30/2010

12/31/20103/31/20116/30/20119/30/2011

12/31/20113/31/20126/30/20129/30/2012


*In 137 CoStar markets with data back to 06Q1.

119 122141 142

115 113 107

8464

5647

38 37 42 41 42 43 50 49 52 5968 70

6078 85 89

105 108119 127 119

107123

132146

157177 177

193 198 200 193183

172159

134

112

9398

10589

8774

62

37

23

11

43 3

3 3 3 43 4

914

1722

21

2324

33

3944

46

6266

74

73

88

8581

81 84

8588 90

9496 109 136

179

202

84%

85%

86%

87%

88%

89%

90%

91%

92%

93%

94%

95%

96%

0

30

60

90

120

150

180

210

240

270

300

330

07 08 09 10 11 12 13 14 15 16 17 18

Under Construction, Preleased & Available (MSF)* Occupancy (%)

Western Ports Slowing While East Rises

Change In TEUS By Region

12/31/2001

12/31/2006

4017812/31/2010

12/31/2016

6/30/2018

Sources: Port Websites; CoStar Portfolio Strategy As of Oct. 2018

*First 8 Months of 2018 vs First 8 Months of 2017

(1,500)

(1,000)

(500)

0

500

1,000

1,500

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Gulf / East2001–'06 Annual Avg+442K TEUs

2010–18 Annual Avg+480K TEUs

(1,500)

(1,000)

(500)

0

500

1,000

1,500Change In TEUs 000s

LA / Long Beach2001–'06 Annual Avg+635K TEUs

2010–18 Annual Avg+359K TEUs

YTD*

New Bulk Product Shifting Focus From West To East This Cycle

Top and Bottom Warehouse/Distribution MarketsEffective Revenue Per Square Foot, Percent Change 2017Q3 – 2018Q3


44%

48%

52%

56%

60%

64%

68%

72%

0

30

60

90

120

150

180

210

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Vacan

cy Rate

Ro

om

s (I

n T

ho

usa

nd

s)

New Supply Net Absorption Occupancy

Forecast

National Hotel MarketSupply & Demand Trends

Source: PWC

New Supply by Hotel Chain2012-2018, Difference in Year-End Supply

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017 2018

Ro

om

s (T

ho

usa

nd

s)

Luxury Upper Upscale Upscale Upper Midscale Midscale/Economy

Source: PWC

Question

• What will be the best performing property sector in 2019?• A. Apartment

• B. Hotel

• C. Industrial

• D. Office

• E. Retail

53

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2011 2012 2013 2014 2015 2016 2017 2018

Tota

l Re

turn

s

U.S. New York Los Angeles San Francisco Washington Chicago Boston

NPI Property Total Returns by Top CSAs

Annual

Chart: C-002-1901

-38%

-28%

-18%

-8%

2%

12%

22%

32%

Tota

l Ret

urn

sChart Title

Bottom 15-Yr Range Top 15-Yr Range Last Yr Current (Falling) Current (Rising)

NPI Property Total Returns by Metro

Chart: C-003-1901

Question

• What is your biggest concern for 2019 (that could impact CRE)?• A. Fed raising interest rates

• B. Political stalemate

• C. Inflation

• D. Trade protectionism

57

Summary

• National returns continue downward trends

• Capital return barely positive leading to new high in market value index

• Cap rate drop slightly to another all time low

• Industrial returns continue to be the strongest sector; retail capital

return turns negative

• Occupancy just down slightly for the quarter after hitting highest return

since tech bust

58

Upcoming NCREIF Events

NCREIF Winter Conference 2019Arizona BiltmoreMarch 18 – 20, 2019

NCREIF Certificate Education ProgramSMU - DallasJuly 15 - 18, 2019

Visit www.ncreif.org for more information

59

http://www.ncreif.org/

Summary

• National returns continue downward trends

• Capital return barely positive leading to new high in market value index

• Cap rate drop slightly to another all time low

• Industrial returns continue to be the strongest sector; retail capital

return turns negative

• Occupancy just down slightly for the quarter after hitting highest return

since tech bust

60

Upcoming NCREIF Events

NCREIF Winter Conference 2019Arizona BiltmoreMarch 18 – 20, 2019

NCREIF Certificate Education ProgramSMU - DallasJuly 15 - 18, 2019

Visit www.ncreif.org for more information

61

http://www.ncreif.org/

Fourth Quarter 2018 NCREIF Indices Review...Disclaimer Today we will be presenting what we see in...

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Transcript of Fourth Quarter 2018 NCREIF Indices Review...Disclaimer Today we will be presenting what we see in...