NCREIF Property Index Released
Largest Negative Returns for Institutional Real Estate since Great Recession
CHICAGO, IL, January 25, 2023 – The National Council of Real Estate Investment Fiduciaries (NCREIF) has released fourth quarter 2022 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for over 10,000 commercial properties, totaling $933 billion of market value. The returns are detailed in the attached Snapshot Report.
The quarterly total return was -3.50% for the fourth quarter which is the first negative return since the COVID impacted second quarter of 2020 and the largest decline since the Great Recession / Financial Crisis in 2009. The quarterly return consisted of 0.95% from income and -4.45% from appreciation. Appreciation is after the deduction of capital expenditures. Market values before considering capital expenditures decreased by 4.08%. The decline reflected a significant increase in the number of write-downs during the quarter which doubled from about 35% to 70% of the properties written down.
The -3.50% return is the unleveraged return for “operating properties” held by institutional investors throughout the U.S. As of quarter-end there were 4,672 properties with leverage and the weighted average loan to value ratio was 42%. Lower unleveraged returns coupled with higher interest rates magnified the negative return for those properties with leverage. Properties with leverage had a total quarterly return on equity of -6.44%. The average interest rate on the leveraged properties rose to 4.3% for the fourth quarter, up from 3.9% the third quarter. A handful of properties had values which were equal to or less than their loan balance and a few properties were returned to the lender.
Hotels Buck the Trend
Hotels were the only property sector in the NPI that had a positive return. The return increased to 3.37% during the fourth quarter compared to 2.69% in the third quarter. Note, however, that there is a much smaller sample of hotel properties in the NPI. The lowest return was for office properties which had a return for the quarter of -4.8%.
Capitalization Rates
Market value weighted capitalization (cap) rates increased to 4.03% compared to 3.82% in the third quarter. NOI growth was surprisingly positive at 2.1% during the fourth quarter. The higher capitalization rate suggests that the growth rate in NOI may be less over the next couple of years.
About the NCREIF Property Index
The NPI consists of 10,770 investment-grade, income-producing properties with a market value of $933 billion. The market value breakdown by property type is about 26% office, 28% apartment, 14% retail, 32% industrial and less than 1% hotel properties. The NPI includes property data covering over 100 CBSAs. In addition, within each property type, data are further stratified by sub-type. These data enhance the ability of institutional investors to evaluate the risk and return of commercial real estate across the United States.