NCREIF Property Index Released
Significant Write-downs lead to Negative Appreciation for Institutional Real Estate in Q3 2022
CHICAGO, IL, October 25, 2022 – The National Council of Real Estate Investment Fiduciaries (NCREIF) has released third quarter 2022 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for over 10,000 commercial properties, totaling $957 billion of market value. The returns are detailed in the attached Snapshot Report.
The quarterly total return was 0.57% for the third quarter which is down from 3.23% the second quarter. The quarterly return consisted of 0.93% from income and -0.37% from appreciation – the first negative appreciation return since the 2nd quarter of 2020. Appreciation is after the deduction of capital expenditures. Market values before considering capital expenditures decreased by 0.09% - the first decline in the index since the 3rd quarter of 2020. The decline was due in part to a significant increase in the number of properties that had their values written down this quarter versus those that were written up. More than half the properties in the index were written down which also hasn’t happened since the 3rd quarter of 2020.
The 0.57% return is the unleveraged return for what is primarily “core” real estate held by institutional investors throughout the U.S. As of quarter-end there were 4,584 properties with leverage and the weighted average loan to value ratio was 41%. Leverage turned negative this quarter as properties with debt financing had a leveraged total quarterly return of 0.36%. The average interest rate on the leveraged properties rose to 3.89% for the third quarter, up from 3.73% the second quarter and 3.43% the first quarter of 2022.
Hotels the Best Performing Sector
Hotels took the leadership away from Industrial properties this quarter to have the highest total return. Note, however, that there is a much smaller sample of hotel properties in the NCREIF index. Apartments came in second with a return of 1.20% for the quarter, followed by Industrial at 1.11%, retail at 0.39% and office at -0.66%.
Capitalization Rates
Market value weighted capitalization (cap) rates were essentially flat at 3.82% during the quarter despite rising interest rates. NOI growth was negative at -0.49% for the third quarter, down significantly from the 4.05% growth the prior quarter. If this continues, cap rates are likely to rise in future quarters unless interest rates reverse course.