Finance Midwest

Investment returns yield moderate gains in 1Q, but fall below 4Q 2010 returns

NPI

The real estate investment market recorded moderate returns in the first quarter, according to the National Council of Real Estate Investment Fiduciaries, a non-profit trade association that tracks the performance of $256 billion of commercial real estate investments.

The real estate investment market recorded moderate returns in the first quarter, according to the National Council of Real Estate Investment Fiduciaries, a non-profit trade association that tracks the performance of $256 billion of commercial real estate investments.

The NCREIF Property Index (NPI) consists of 6,267 investment‐grade, non‐agricultural, income‐producing properties consisting of apartments, office, retail, industrial and hotels. In the first quarter of 2011,  total return was 3.4 percent; comprised of a 1.5 percent income return and a 1.8 percent capital appreciation return. NCREIF reports that this was the fifth consecutive  quarter of positive total return. However, the organization does note that the capital appreciation, income and total returns were all lower than the fourth quarter 2010 results. Also, Net Operating Income (NOI) fell and vacancy rates rose for the properties included in the Index.

“Institutional real estate continues its steady climb back from the depths of the downturn, as property values continue to improve due to strong investor interest," said Roy Rendino, CEO of NCREIF in the release. "However, NOI growth persists as an issue and vacancy rates remain high.”

The NPI tracks properties in 195 MSAs and all the properties have been acquired  on behalf of tax-exempt institutional investors, with the great majority being pension funds.

Other finds in the first quarter report:

-Cap rates have fallen from a high of 7.0 percent a year ago to 6.1 percent this past quarter, despite a drop in net operating income, reflective of investors’ increased appetite for Core real estate.

- The spread between the property sectors narrowed dramatically compared to the fourth quarter. Last quarter, the gap between the best and the worst performing sectors was 294 basis points. This quarter, the gap narrowed to 49 basis points.

-Apartments, which outperformed other sectors for most of 2010, trailed hotel and retail this quarter. Capital appreciation, which had been driving apartment returns, slowed to its lowest increase in four quarters.

-Within property types, returns were more diversified. Neighborhood retail led all subcategories with a 6.6% total return. At the same time, power centers, regional malls and community centers were all among the worst performing segments at 2.8%, 2.6% and 2.6%, respectively.

-The East remained the best performing region for the fourth consecutive quarter.

However, the gap narrowed dramatically, with the West a mere four basis points behind. The Mideast was the strongest division within the East region for the third consecutive quarter.