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NCREIF Q3 Summary Report


Industrial properties have the lowest Income Return but had the highest appreciation return AGAIN.

Industrial income return is at its LOWEST LEVEL EVER.


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. Note Industrial’s decline in the most recent quarter.


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 in Q3. The dashed red line is projected rates into Q1 2023 based on the most current Fed’s “dot plot”. This will have a material impact ADVERSE on both income and appreciation returns going forward.


ALL PROPERTY TYPES COMBINED: Income returns continue to decline as well as appreciation returns. The decline in INCOME returns is troublesome due to the rise in competing benchmark asset classes. The appreciation returns went NEGATIVE in Q3.


ALL PROPERTIES COMBINED: Annual return declined in Q3 and WILL continue to do so into the future as holder quarters with high returns drop off. Total returns were driven by INDUSTRIAL properties but that has stopped Note in the lower graphic that quarterly income returns are DECLINING.


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

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.


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.


INDUSTRIAL PROPERTIES: as a % of NCREIF: NCREIF’s composition by property type gradually changes over time. Below are the changes from the 10-year period from Q4 2011 to Q2 2021. 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 the record low-income returns.


OFFICE: Income returns decreased in Q3 even as appreciation was negative.


OFFICE: COVID-induced demand drop, rising 10-year Treasury rates, recession—not looking good for the office. Income returns at all-time lows.


APARTMENT: Income returns declined in Q3 even as appreciation returns pulled back—not good.


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


RETAIL: Income return had been slowly increasing but decreased in Q3 even with property values down.


RETAIL: COVID was NOT good for retail which is very slowly recovering. Q3 was a step back.


Economist Bill Knudson provides regular economic analysis.

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