Second Quarter 2018NCREIF Indices Review
August 14, 2018
Panelist Overview
Jeff Fisher
NCREIF Data, Research & Education Consultant
Hans Nordby
Managing Director
CoStar Portfolio Strategy
Special thanks to Kevin Scherer, NCREIF Consultant for Slides from NCREIF Analytics
Disclaimer
Today we will be presenting what we see in the NCREIF data, trends and changes; all comments about future expectations are the personal views of the speakers (and could be wrong!) and not a reflection of a NCREIF opinion or forecast.
Overview
• NPI return up for quarter - highest return since 2nd quarter of 2016
• Volatility of total returns continue at a historic low
• Industrial still the leader of the Pac
• But retail showed some recovery this quarter
• Occupancy holding near its 15-year high
• Rental growth holding up
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NCREIF OverviewSecond Quarter 2018 Index Composition
5
NCREIF Property Index
(NPI)
NPI Leveraged Property Index
NFI-ODCE (Fund Index – Gross of
Fees)
Farmland Properties
Timberland Properties
Leverage Unlevered 42% 22% Unlevered Unlevered
Quarterly Return
1.8% 2.1% 2.0% 1.1% 0.5%
1 Year Return
7.2% 8.5% 8.4% 6.6% 3.6%
1.7% 2.0%1.3% 0.9%
2.2%
-6.7%
-0.8%
7.1%8.3%
7.1%
3.7%
8.1%
-1.1%
14.0%
6.1% 6.5%
12.1%
4.0%5.1%
6.9%
9.5%
-10%
-5%
0%
5%
10%
15%
20%
NPI NPI Levered Farmland Timberland NFI-ODCE NAREIT S&P 500
Tota
l Re
turn
3/31/2018 1-Yr 10-Yr Avg
Total Returns by Asset Class
Chart: 260
LAST QUARTER
Leading Indicator, Or Noise?
REIT vs. NCREIF Capitalization Rates
REITs Look Cheap
REIT vs. Private Market Current Yield Spread
Question
• What will be the best performing asset class in 2018?• A. NCREIF Leveraged Returns
• B. Farmland
• C. S&P 500 Stocks
• D. Corporate Bonds
• E. NAREIT Index
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13Note: The Market Value Index (MVI) is an equal-weighted index and excludes expansion capital expenditures.
Prices Still Rising
Another New High
YTD Transaction Volume Is 9% Lower Than 2017
Year/Year Transaction Volume
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
0
100
200
300
400
500
600
700
800
900
1000
1998 2001 2004 2007 2010 2013 2016
Vo
lum
e (M
il)
Num
ber
of S
ales
Number of Sales Transaction Volume
NPI Transaction Volume
Annual
Chart: 258
Retail And Office Dragging Transaction Volume
YTD Year/Year Transaction Volume By Property Type
Question
• When will the Market Value Index (MVI) peak for this cycle?• A. Peaked this quarter
• B. Before end of 2018
• C. 2019
• D. 2020 or later
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Exposure To Industrial Drives OutperformanceDifference Between NCREIF Returns With And Without Industrial
Sources: NCREIF; CoStar Portfolio Strategy As of 18Q2
(1.0%)
(0.5%)
0.0%
0.5%
1.0%
1.5%
95 97 99 01 03 05 07 09 11 13 15 17
NCREIF Return With Industrial - Return Without
Current Quarter Basis Point Total Return Impact by Metro
Apartment Industrial
Office Retail
22
0.00
1.00
2.00
3.00
4.00
Los Angeles Riverside New York Oakland AnaheimSantaAna
Irvine
Return Impact (BP) Industrial
Deliveries Weighing Heavily on Washington, DC Office Returns
Washington, DC Office Total Returns and Supply
Metro
Ptype
9/30/201512/31/2015
3/31/20166/30/20169/30/2016
12/31/20163/31/20176/30/20179/30/2017
12/31/20173/31/20186/30/2018
Source: CoStar Portfolio Strategy As of 18Q2
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Deliveries
(2%)
(1%)
0%
1%
2%
3%
4%
5%
6%
7%
8%
13 14 15 16 17 18
Income Return Appreciation Return Total Return
Annual Returns Annual Deliveries (SF)
Question
• What will be the best performing property sector in 2018?• A. Apartment
• B. Hotel
• C. Industrial
• D. Office
• E. Retail
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Question
• What will cap rates be for the nation by the end of 2018?• A. Below 4%
• B. 4% to 5%
• C. 5% to 6%
• D. Above 6%
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Office: Significantly More Demand Growth In 4&5 Star Product
Cumulative Net Absorption Since 2010 Nationally
3/31/20056/30/20059/30/2005
12/31/20053/31/20066/30/20069/30/2006
12/31/20063/31/20076/30/20079/30/2007
12/31/20073/31/20086/30/20089/30/2008
12/31/20083/31/20096/30/20099/30/2009
12/31/20093/31/20106/30/20109/30/2010
12/31/20103/31/20116/30/20119/30/2011
12/31/2011
Source: CoStar Portfolio Strategy
Note: Includes 54 major U.S. metros As of 18Q2
0
100
200
300
400
500
600
10 11 12 13 14 15 16 17 18
4 & 5 Star 3 Star And Below
Cumulative Net Absorption Since 2010 (Millions SF)
Absolute (SF) %
4 & 5 Star 376,184,577 15.7%
3 Star And Below 207,559,499 4.3%
Demand Growth Since 2010
Office: The Flight To High-Quality Office Is Widespread
Net Absorption By Building Quality
Include?
1
1
1
1
1
1
1
1
2
3
4
5
6
7
8
9
Source: CoStar Portfolio Strategy As of 18Q2
(2)
(1)
0
1
2
3
4
5
6
7
Ne
w Y
ork
San
Jo
se
Da
llas -
FW
Sea
ttle
Washin
gto
n, D
.C.
Ch
icag
o
San
Fra
ncis
co
Atlan
ta
De
nver
Lo
s A
ngele
s
Austin
Ch
arlo
tte
Port
land O
R
Bosto
n
Mia
mi
4 & 5 Star 3 Star 1 & 2 Star Net Absorption
Four-Quarter Net Absorption (Million SF)
2Q 2018
Retail: 2018 Announcements Outpacing Record Setting 2017
Announced Store Closures By Square Feet
Sources: Business Insider; Clark Howard; ICSC; SEC Filings; RIS; CoStar Portfolio Strategy As of May 2018
87 MSF 76 MSF
105 MSF
95 MSF
0
20
40
60
80
100
120
2008 2016 2017 2018
Q1 Q2 Q3 Q4
Retail Space Announced For Closure (MSF)
Office Rents Rolling Up 20%+ To Market
Difference Between Current Office Market Rent And Rent Five Years Prior
3/31/20056/30/20059/30/2005
12/31/20053/31/20066/30/20069/30/2006
12/31/20063/31/20076/30/20079/30/2007
12/31/20073/31/20086/30/20089/30/2008
12/31/20083/31/20096/30/20099/30/2009
12/31/20093/31/20106/30/20109/30/2010
12/31/20103/31/20116/30/20119/30/2011
12/31/20113/31/20126/30/2012
Source: CoStar Portfolio Strategy As of 18Q2
Note: Assumes five-year lease term with no rent steps
(10%)
(5%)
0%
5%
10%
15%
20%
25%
07 08 09 10 11 12 13 14 15 16 17 18
Difference Between Current Office Market Rent And Rent Five Years Prior
Apartment: Workforce Segment Outperforms
Asking Rent Growth By Building Rating (National Index)
2.002.002.002.002.002.002.00
12/31/20013/31/20026/30/20029/30/2002
12/31/20023/31/20036/30/20039/30/2003
12/31/20033/31/20046/30/20049/30/2004
12/31/20043/31/20056/30/20059/30/2005
Source: CoStar Portfolio Strategy As of 18Q2
Note: The National Index is an aggregation of 54 major U.S. markets
(2.5%)
2.1%
3.2%3.6%
1.7%
(2.3%)
1.8%
3.1%
4.7%
3.1%
(2.3%)
1.2%
2.1%
3.8%
3.3%
(3%)
(2%)
(1%)
0%
1%
2%
3%
4%
5%
6%
2008-09 2010-11 2012-13 2014-15 2016-17
4 & 5 Star 3 Star 1 & 2 Star
Average Annual Rent Growth
Industrial: Rents Have Not Peaked Yet
Bulk-Regional Asking Net Rents - Last Cycle, Today, & 2022
123456789
101112151719212223272821222324252627
Source: CoStar Portfolio Strategy As of 18Q2
$3
$6
$9
$12
$15
Prerecession Max/Recession Min Range Today 22Q4
Rent ($/SF)
Question
• Which property type will have the highest NOI growth in 2018?• A. Apartment
• B. Industrial
• C. Office
• D. Retail
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Why Industrial: Low Capex; High Cash Yields
NCREIF Cap Rates, Capex & Cash Yields
Sources: NCREIF; CoStar Portfolio Strategy As of 18Q2
Rolling 4 Quarter Cap Rate - Capex = Cash Yield
4.3%
-1.0%
3.3%
4.6%
-2.6%
2.0%
4.6%
-1.8%
2.8%
4.9%
-1.4%
3.5%
Cap Rate Capex Cash Yield
Apartment Office Retail Industrial
Apartment: High End Rent Growth Remains Scarce
One Bedroom Apartment Rent Growth By Decile
1 2 3 4 5 6 7 8 9 10
08Q2 2.5% 2.3% 2.2% 2.3% 2.1% 2.0% 2.1% 2.2% 2.3% 2.4%
09Q2 (1.2%) (1.3%) (1.1%) (1.8%) (1.5%) (1.9%) (1.9%) (2.1%) (2.5%) (2.6%)
10Q2 (1.2%) (1.5%) (1.7%) (1.6%) (1.5%) (1.7%) (2.1%) (1.8%) (2.2%) (2.6%)
11Q2 1.9% 1.9% 1.8% 1.9% 1.9% 1.9% 1.7% 1.7% 1.7% 1.3%
12Q2 3.1% 3.0% 2.7% 3.0% 2.7% 2.7% 2.6% 2.6% 2.3% 2.1%
13Q2 4.7% 4.4% 4.1% 4.1% 4.1% 3.9% 3.4% 3.5% 3.2% 2.8%
14Q2 4.2% 4.0% 3.6% 3.4% 3.5% 3.2% 2.9% 2.7% 2.7% 2.2%
15Q2 7.7% 7.1% 7.4% 7.0% 6.6% 6.4% 6.3% 5.8% 5.2% 3.4%
16Q2 5.9% 5.9% 5.8% 5.6% 5.5% 4.7% 4.4% 4.0% 3.1% 1.6%
17Q2 4.9% 4.6% 4.2% 4.1% 3.3% 3.3% 2.8% 2.5% 2.0% 0.7%
18Q2 3.8% 3.9% 3.7% 3.8% 4.0% 3.4% 3.3% 3.4% 2.9% 1.9%
"B" Properties "B+/A-" Properties "A/A+" Properties
Source: CoStar Portfolio Strategy As of 18Q2
*Deciles established at individual metro level
Building Deciles
"C/D" Properties
Question
• What will the annual NPI total return be for 2018? (Current rolling annual return 7.1%)• A. Below 5%
• B. 5%-to-7%
• C. 7%-to-9%
• D. Above 9%
58
Summary
• Returns below average but holding steady although slight uptick this
quarter
• But widening disparity of returns across property sectors
• Cap rate spreads near long-term averages could mitigate pressure on
cap rates from interest rate increases
• NOI growth good for industrial; moderate for office and apartment but
negative for retail
• Overall occupancy at historic high driven by industrial
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Upcoming NCREIF Events
NCREIF Fall Conference 2018Orlando, FLNovember 6 – 9
Data Submission TrainingWebinarTuesday October 9th 1pm CST
Visit www.ncreif.org for more information
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