The National Council of Real Estate Investment Fiduciaries has reported that its National Property Index recorded its seventh consecutive quarter of positive total return in the third quarter of 2011. Total returns for the third quarter were 3.30 percent; comprised of a 1.46 percent income return and a 1.83 percent capital appreciation return.
However, despite the positive momentum, returns were 64 basis points lower than last quarter.
The NPI consists of 6,489 investment-grade, non-agricultural, income-producing properties consisting of apartments, office, retail, industrial and hotels, with an assessed value of $272 billion.
All five property sectors were positive for the quarter as were each of the four regions.
Apartments were the best performing sector again this quarter after being outpaced by industrial in the second quarter. Retail was a close second with a total return of 3.58 percent, two basis points behind apartment’s 3.60 percent. The industrial sector continued its rebound with a total return of 3.39 percent.
Regionally, the West’s 3.77 percent was the best performing led by the Pacific division’s 3.94 percent total return. The South was the second best region at 3.20 percent. Returns in the West were led by retail, which had a 4.37 percent total return. The Midwest experienced returns of 2.96 percent, bringing the one-year total to 13 percent.
The past quarter also brought improvements in some of the fundamentals as occupancy rates improved from 88.3 percent to 88.7 percent. The report states that this activity may have triggered cap rates to continue to compress as they fell to 5.8 percent.
However, as some fundamentals are improving, rents still seem to be stagnant. In fact, NOI declined in the third quarter, dropping 1.2 percent after rising 3.2 percent the previous quarter.
“One of the things that may be the cause of this is that even though leases were signed, landlords are still giving free rent,” said Jeff Havsy, director of research for NCREIF.
Havsy says that the make -up of the property mixed changed somewhat in the third quarter as well as NCREIF added more industrial buildings to the portfolio. Industrial facilities tend to yield lower rents, which may have skewed the numbers.
The majority of properties in the index are higher-end, class A facilities that attract institutional investors. The NPI reflects that trends that have been present in the overall market. As investment activity has picked up, investors are chasing quality property, creating a bifurcated market. As dollars flock to core properties, the fundamentals in that market continue to improve. Yet with few investors willing to take on value-added properties right now, the non-core market continues to trend downward.
The outlook is much more positive for core real estate, says Havsy.
“I am cautiously optimistic that things will continue to slowly improve in the market,” says Havsy. “The leasing activity could be in anticipation of an increase in future income streams. Owners are seeing positive signs out there and we might start to see free rent burn off.”
