Third Quarter 2017 NCREIF Indices Review. Fall Conference November 7, 2017

Transcription

1 Third Quarter 2017 NCREIF Indices Review Fall Conference November 7, 2017

2 Panelist Overview Jeff Fisher NCREIF Data & Research Consultant Sara Rutledge NCREIF Director of Research John Ehli Portfolio Manager Deutsche Asset Management

3 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 not a reflection of a NCREIF opinion or forecast.

4 Overview Steady as She Goes 3Q 2017 NPI total return nearly equal to same quarter last year Volatility of total returns at historic low Industrial remains the top performer Net NFI-ODCE fund flows remain negative for the trailing year Occupancy holding at its 15-year high Rental income growth mixed by property type as retail struggles and industrial remains strong 4

5 NCREIF Overview Third Quarter 2017 Index Composition NPI NPI - Leveraged Properties Only NFI-ODCE Farmland Timberland Contributors Properties 7,165 3,568 2, Market Value $543.5 B $349.8 B $220.9 B $8.1 B $26.2 B Inception Date 1978 Q Q Q Q Q1 Sold Properties Leverage Unlevered 41.5% 21.3% Unlevered Unlevered Quarterly Return 1.70% 2.01% 1.87% 1.02% 0.60% 1 Year Return 6.89% 8.96% 7.66% 6.15% 3.28% Note: NFI-ODCE returns are gross of fees. 5

6 Total Return Trends by Asset Class Comparison as of September 30, Q Year 10-Year 20% 18% 18.6% 16% 14% 12.6% 12% 10% 9.0% 8% 6% 4% 2% 6.9% 6.2% 1.7% 2.0% 7.6% 1.0% 6.2% 0.6% 3.3% 1.9% 7.7% 5.2% 5.0% 1.1% 2.6% 6.1% 4.5% 7.4% 0% NPI Leveraged NPI NCREIF Farmland NCREIF Timberland NFI-ODCE - gross of fees NAREIT Equity REIT Index S&P 500 Index 6

7 Market Value Index NPI Total Return NPI Total Return Stable at 1.5%-to-1.75% for Past 5 Quarters 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 with Prices Still Rising and Well Above Long-Term Trend and Prior Peak Note: The Market Value Index (MVI) is an equal-weighted index and excludes expansion capital expenditures. 7

8 NPI VIX : 4Q Standard Deviation of Total Returns 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 8

9 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 Annual NPI Return History 30% Total Return Income Return Capital Return 20% 10% 0% -10% -20% -30% 9

10 Loan-to-Value Ratio Implied Interest Rate Property Leverage Ratio for All NPI and ODCE with Implied Interest Rate Property LTV - All NPI Property LTV - ODCE Implied Interest Rate 45% 40% 35% 30% 25% 14% 12% 10% 8% 20% 15% 10% 5% 0% 6% 4% 2% 0% 10

11 Question What will be the best performing asset class in 2017? A. NCREIF Leveraged Returns B. S&P 500 Stocks C. Corporate Bonds D. NAREIT Index 11

12 Real GDP Growth NPI Total Return Annual Real GDP Growth and NPI Total Return Annual GDP Growth Annual NPI Total Return 6% 5% 4% 3% 2% 1% 0% 25% 20% 15% 10% 5% 0% -5% -1% -2% -3% -4% -10% -15% -20% -25% Source: U.S. Bureau of Labor Statistics, NCREIF. 12

13 Quarterly Growth, SAAR Quarterly Real GDP Growth: Contributions by Major Component 6% Personal Consumption Business Investment Residential Investment Inventories Exports Imports Government GDP Growth 5% 4% 3% 2% 1% 0% -1% -2% -3% 1Q Q Q Q Q Q Q Q Q Q Q 2017 Source: U.S. Bureau of Economic Analysis, NCREIF. 13

14 Office Employment Growth NPI Total Return Annual Office Employment Growth and NPI Total Returns Annual Office Job Growth Annual NPI Total Return 8% 6% 4% 2% 0% -2% -4% -6% -8% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Source: U.S. Bureau of Labor Statistics, NCREIF. 14

15 Annual Job Growth Annual Job Growth: Key Real Estate Segments 8% Office Transp/Warehousing Retail 6% 4% 2% 0% -2% -4% -6% -8% Source: U.S. Bureau of Labor Statistics, NCREIF. 15

16 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 ODCE Net Fund Flows ($Bil) NFI-ODCE Fund Flows 4Q Rolling Total as of September 30, 2017 $20.0 Contributions Distributions/Redemptions $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 16

17 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 NFI-ODCE Fund Flows (% Net RE Assets) NFI-ODCE Fund Flows as Share of Net Real Estate Assets 4Q Rolling Total as of September 30, % Net Flows Contributions Distributions/Redemptions 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 17

18 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 NFI-ODCE Net Fund Flows (% Net RE Assets) Annual Total Return NFI-ODCE Net Fund Flows as Share of Net Real Estate Assets with Total Returns 4Q Rolling Fund Flows Share/Annual Returns as of September 30, % Net Flows NFI-ODCE Annual Total Return NPI Annual Total Return 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% -40.0% 18

19 1990Q4 1991Q4 1992Q4 1993Q4 1994Q4 1995Q4 1996Q4 1997Q4 1998Q4 1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q4 2016Q4 Capital Return Percent Sold 1990Q4 1991Q4 1992Q4 1993Q4 1994Q4 1995Q4 1996Q4 1997Q4 1998Q4 1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q4 2016Q4 Sold Properties Sales Volume ($Bil) NPI Sale Transactions 1, Q Rolling Sold Properties 4Q Rolling Sales Volume Annual NPI Sales Transactions and Volume $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Annual Capital Return and Share of NPI Properties Sold 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Capital Return Percent Sold 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 19

20 QMA Value Weighted Cap Rate Long-Term NPI Implied Appraisal Capitalization Rate Trend 9.0% Cap Rate 20Y Avg SI Avg 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Note: Implied Cap Rate Equals Current Quarter NOI Divided by Current Quarter Market Value Multiplied by 4. 20

21 1997Q1 1997Q3 1998Q1 1998Q3 1999Q1 1999Q3 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 NPI Cap Rate Spread NPI Cap Rate Spreads: 10Y U.S. Treasury and Corporate BBB Effective Yield 5% Spread to Corp BBB 20Y Avg - BBB Spread to 10Y UST 20Y Avg - UST 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Source: Federal Reserve Bank of St. Louis (FRED), NCREIF. 21

22 Question What will cap rates be for the nation by the end of 2017? A. Below 4% B. 4% to 5% C. 5% to 6% D. Above 6% 22

23 QMA Cap Rate NPI Capitalization Rates: Trend by Property Type 10% Apartment Industrial Office Retail 9% 8% 7% 6% 5% 4% 23

24 2011-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 Discount Rate NFI-ODCE Fund Discount Rates: Trend by Property Type 10-Year Holding Period 9.0% Apartment Industrial Office Retail 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% Note: Data excludes two NFI-ODCE funds. Source: Altus, NCREIF. 24

25 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q NCREIF Indicators: Market Value Index (MVI) Level Annual Change MVI 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% MVI by Property Type Apartment Industrial Office Retail Note: The Market Value Index (MVI) is an equal-weighted index and excludes expansion capital expenditures. 25

26 Question When will the Market Value Index (MVI) peak for this cycle? A B C D or later 26

27 NPI Total Returns: Current Quarter Detail Property Size Total Returns 2.5% 2.0% Fund Type Total Returns 3.0% 2.5% 1.5% 2.0% 1.0% 0.5% 1.50% 2.03% 1.5% 1.0% 0.5% 1.58% 1.87% 1.62% 2.50% 0.0% > $100 million <= $100 million Appraisal Type Total Returns 0.0% ODCE Open End Separate Account Ownership Returns Closed 2.0% 1.5% 1.0% 0.5% 0.0% 1.66% 1.74% External Internal 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1.62% Joint Venture 1.76% Wholly Owned 27

28 Seattle Los Angeles NPI Denver San Francisco Chicago Boston New York City Dallas Houston Washington DC NPI Total Returns: Top 10 Markets by Market Value Top 10 Markets versus All Others 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 3.5% 1.62% Top 10 Markets 1.80% Other Markets Top 10 Markets MV ($Bil) New York City $ Los Angeles $ Washington DC $ Chicago $ San Francisco $ Seattle $ Boston $ Dallas $ Houston $ Denver $ Quarterly Total Return: Top 10 and NPI 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 28

29 Current Quarter Basis Point Total Return Impact by Metro Apartment Office Seattle Chicago Houston New York Silver Spring MD Industrial Retail Los Angeles Seattle New York Inland Empire Tacoma Washington DC New York Seattle Boston Orange County New York Washington DC Baltimore Knoxville TN San Diego 29

30 NPI Total Returns by Property Type: 3Q 2017 Income Capital Total 3.5% 3.3% 3.0% 2.5% 2.0% 1.7% 2.2% 2.3% 2.1% 1.5% 1.0% 1.1% 1.2% 1.4% 1.1% 1.1% 1.2% 0.5% 0.0% 0.6% 0.3% 0.1% 0.1% Apartment Hotel Industrial Office Retail 30

31 NPI Total Returns: Current Quarter Property Type Detail Apartment by Subtype 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1.27% 1.67% Office by Location/Value 2.41% High-rise Low-Rise Garden Industrial by Size/Type 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 3.45% 3.45% Local Wh. (<= 250K SF) Retail by Type Regional Wh. (250K-500K SF) 3.23% National/Bulk Wh. (500K+ SF) 2.48% Other Industrial 2.0% 1.6% 1.4% 1.5% 1.2% 1.0% 1.0% 0.5% 1.29% 1.74% 1.19% 0.8% 0.6% 0.4% 1.22% 1.41% 0.96% 0.0% CBD Suburban > $100M Suburban <= $100M 0.2% 0.0% Super Reg./Reg. Neighborhood/Comm. Other Retail 31

32 NPI Total Returns by Property Type: Annual Returns Over Last Five Years 18.0% 3Q Q Q Q Q % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Apartment Hotel Industrial Office Retail 32

33 NCREIF Analytics: Market Performance Report 5-Yr. Risk v. Return San Francisco Seattle Los Angeles Boston Chicago New York Washington DC

34 Question What will be the best performing property sector in 2017? A. Apartment B. Hotel C. Industrial D. Office E. Retail 34

35 NPI Net Operating Income Growth Rolling Four Quarters 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 4.1% 5.9% 5.7% 5.4% 5.1% 1.0% 0.0% 3Q Q Q Q Q

36 Q Rolling NOI Growth NPI Net Operating Income Growth Trends by Property Type 15% Apartment Industrial Office Retail 10% 5% 0% -5% -10% 36

37 NPI Rental Income Growth Rolling Four Quarters 6.0% 5.0% 4.0% 3.0% 2.0% 4.9% 3.9% 4.2% 4.1% 3.4% 1.0% 0.0% 3Q Q Q Q Q

38 Q Rolling Rent Growth NPI Rental Income Growth Trends by Property Type Apartment Industrial Office Retail 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 38

39 2011-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 Rent Growth NFI-ODCE Average Projected Market Rent Growth by Property Type 10-Year Holding Period 3.8% Apartment Industrial Office Retail 3.6% 3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% Note: Data excludes two NFI-ODCE funds. Source: Altus, NCREIF. 39

40 Question Which property type will have the highest NOI growth in 2017? A. Apartment B. Industrial C. Office D. Retail 40

41 Recent Occupancy Rate Trends 100% Occupancy Last Five Years NPI ODCE 95% 91.2% 90.7% 92.7% 91.8% 92.9% 93.3% 93.3% 93.2% 92.6% 92.3% 90% 85% Occupancy Last Five Quarters 95% 94% 93.2% 93.2% 93.3% 93.3% 92.9% 92.9% 93% 92.6% 92.7% 92.2% 92.3% 92% 91% 90% 89% 88% 87% 86% 85% 3Q Q Q Q Q % 3Q Q Q Q Q

42 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 Occupancy Rate Long-Term Occupancy Rate Trends 95.0% 94.0% 93.0% 92.0% 91.0% 90.0% 89.0% 88.0% 87.0% 86.0% NPI NFI-ODCE 85.0% 42

43 Occupancy Rate Trends by Property Type Apartment Industrial Office Retail 43 90% 91% 92% 93% 94% 95% 96% 97% NPI ODCE 86% 88% 90% 92% 94% 96% NPI ODCE 84% 86% 88% 90% 92% 94% 96% 98% NPI ODCE 82% 84% 86% 88% 90% 92% 94% NPI ODCE

44 NCREIF Indictors: Cap Ex Ratio (CXR) and Free Cash Flow Yield (FCFY) Cap Ex Ratio, Rolling Four Quarters 2.5% 2.0% CXR (4Q roll) 20Y Avg 1.5% 1.0% 0.5% 0.0% Free Cash Flow Yield, Rolling Four Quarters 9% FCFY (4Q Roll) 20Y Avg SI Avg 8% 7% 6% 5% 4% 3% 2% 44

45 3Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q QMA CapEx as % of NOI NCREIF Indicators: Total Capital Expenditures as Share of NOI by Property Type 65% Apartment Industrial Office Retail 55% 45% 35% 25% 15% 5% 45

46 3Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 NCREIF Indicators: Capital Expenditure Detail as Share of NOI by Property Type Apartment Industrial 40% 14% Leasing Com. TI's Bldg Imp. 35% 12% Leasing Com. TI's Bldg Imp. 30% 25% 10% 20% 8% 15% 6% 10% 5% 4% 0% 2% Office 35% 30% 25% 20% 15% 10% 5% 0% Leasing Com. TI's Bldg Imp. Retail 20% 15% 10% 5% 0% Leasing Com. TI's Bldg Imp. 46

47 Question What will the annual NPI total return be for 2017? A. Below 5% B. 5%-to-7% C. 7%-to-9% D. Above 9% 47

48 Summary Macroeconomic trends suggest support for steady, below average real estate returns Cap rate spreads near long-term averages should insulate values from rising interest rates Rental income and NOI growth are above average overall, although retail has slowed considerably Overall occupancy remains elevated and was steady year-over-year across property types 48

49 Upcoming NCREIF Events NCREIF Winter Conference 2018 Scottsdale, AZ Scottsdale Resort at McCormick Ranch March NCREIF Summer Conference 2018 Charlotte, NC June NCREIF Fall Conference 2018 Lake Buena Vista, FL Walt Disney World Swan November 6 9 Visit for more information 49