THE QUARTERLY - Q1 2022
NCREIF Property Index Returns
Industrial properties had the lowest Income Return but had the highest appreciation return AGAIN which is near RECORD levels. Industrial income return is at its LOWEST LEVEL EVER.
Rolling 4 Quarter Income Returns for all 4 property types are near record lows.
This implies cap rates are also near record lows.
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 Q1. The dashed red line is projected rates thru yearend based on the Fed’s 3.16.22 “dot plot” of anticipated rate increases thru 2022. This would have a material impact on both income and appreciation returns going forward.
ALL PROPERTY TYPES COMBINED: Income returns are tapering off as appreciation increases are recorded. The appreciation return spikes continue to be driven by record increases in industrial properties.
ALL PROPERTIES COMBINED: Annual return for Q4 came in at a near-record rate of 21.89% driven primarily by Industrial properties. Note in the lower graphic that quarterly income returns are DECLINING.
INDUSTRIAL: Total returns are being 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: Returns are THE LARGEST APPRECIATION EVER---since ~1976 NCREIF Index creation.
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 returns posted by industrial properties.
OFFICE: Income returns have tapered off as appreciation returns increased.
OFFICE: Income returns have been relatively flat. Appreciation plummeted in Q2 2020 COVID but has improved since then.
APARTMENT: Income returns bottom out in Q4 2020 when record-low mortgage occurred and have risen since. Appreciation returns have followed a similar pattern.
APARTMENT: INCOME returns increased driving APPRECIATION RETURNS to record highs.
RETAIL: Income returns have been slowly increasing as property appreciation has modestly increased.
RETAIL: As INCOME returns have slowly increased, appreciation returns have also increased.