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NCREIF Q1 2023 Summary Report

Updated: Apr 27, 2023


2. ALL PROPERTY TYPES: For the past 4 quarters only Industrial and Retail properties eked out a positive total return. Only retail had a positive return in the 1st quarter of 2023. In Q1 all properties had NEGATIVE appreciation returns reflecting the changes in cap rates as CRE pricing adjusts to a higher interest rates environment. Industrial properties continue to have the lowest Income Return which is near its LOWEST LEVEL EVER.


3. Rolling 4 Quarter Income Returns for 3 of the 4 property types are near record lows. This implies cap rates are also near record lows. Even with the 1st quarter property value write-downs, income returns were not materially changed. The key issue is: are NOI returns being driven by property write-downs or by actual increases in NOI.


4. US 10 Year Treasury Rate and Rolling 4 Quarter Income Returns have a high correlation.

Property returns in essence are risk-based relative to the US Treasury 10-year rates

which dramatically increased starting in Q2 2022. The dashed red line is projected rates into Q4 2024 based on the most current Fed’s “dot plot” and the inverted yield curve’s 10 Year Treasury spread. This will have a material impact ADVERSE on both income and appreciation returns going forward.


5. ALL PROPERTY TYPES COMBINED: Income returns increased slightly in

Q1 as property appreciation was negative. The low INCOME returns are troublesome due to the rise in competing benchmark asset classes. The appreciation returns remained NEGATIVE in Q1 and dropped 2.82 in Q1 2023.


6. ALL PROPERTIES COMBINED: Annual return went negative in Q4 and WILL continue to do so into the future as prior quarters with high returns drop off. Total returns were driven by INDUSTRIAL properties but even this property type’s returns have gone negative in Q4. Note in the lower graphic that quarterly income returns are DECLINING.


7. NOI Growth Due to Property Devaluation vs NOI Increase: NOI actually increased in each of the 4 property types above and beyond property write-downs. Industrial properties had a 1.65% decrease in property value, and the NOI return increased due to a 7.4% increase in NOI return between 4Q and 1Q. For office properties, NOI increased by 1.95%. Given the NOI return is 1.06% a 1.95% increase in NOI equals about 2bp in NOI return. To go from 1.06% to the desired 1.16% return will take 5 quarters provided no property write-downs. The 11% write-downs in Q4 and Q1 pushed the NOI to return to 1.14%


8. INDUSTRIAL: TOTAL returns HAD been driven by record-shattering Appreciation returns. Income returns have been decreasing indicating that FUTURE income increases are anticipated or decreases in CAP RATES.

With rising 10 Year Treasury rates, whether the lower cap rates can be maintained is subject to debate. It is true that demand for Industrial property increased during the 2020-2022 COVID outbreak as people stayed home and did more online shopping. With COVID becoming less of a public policy issue, it remains to be seen if the online shopping trend will remain at high levels.


9. INDUSTRIAL: The record returns are OVER. Income returns are record lows (lowest of ANY property type that I can recall), appreciation is dropping off FAST and that will pull down the TOTAL returns.


10. INDUSTRIAL PROPERTIES as a % of NCREIF: NCREIF’s composition by property type gradually changes over time. Below are the changes from the 12-year period from Q4 2011 to Q1 2023. There has been a material increase in Industrial Properties. Because of this composition change, the Total NCREIF return is higher due to record-shattering industrial property returns. Beware of Industrial Properties' record low-income returns.


11. OFFICE: Income returns increased in Q1 driven by the quarter’s negative appreciation of 11% over the past 2 quarters.


12. OFFICE: COVID-induced demand drop, rising 10-year Treasury rates, recession—not looking good for the office. Income returns are no longer near all-time lows due to the property write-downs.


13. APARTMENT: Income returns have increased due to a 7% decrease in property values during Q4 and Q1.


14. APARTMENT: Total annual returns will fall off FAST as prior high-quarter returns are not maintained.


15. RETAIL: Income return had been slowly increasing. The Q1 increase in income returns was helped partially by the decline in property values for Q4 and Q1.


16. RETAIL: COVID was NOT good for retail which is very slowly recovering. Retail properties did not have valuation spikes during the COVID time period.


Economist Bill Knudson provides regular economic analysis.

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