Fourth Quarter 2017 NCREIF Indices Review February 9, 2018

Transcription

1 Fourth Quarter 2017 NCREIF Indices Review February 9, 2018

2 Panelist Overview Jeff Fisher NCREIF Data & Research Consultant Doug Herzbrun Global Head of Research CBRE Global Investors

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 could be wrong!) and not a reflection of a NCREIF opinion or forecast.

4 Overview Steady as She Goes NPI ends year on an uptick Volatility of total returns continue at a historic low Industrial remains by far the top performer Net NFI-ODCE fund flows remain negative for the year Occupancy holding at its 15-year high Rental income growth mixed by property type as retail and apartment struggle while industrial and office remains strong 4

5 NCREIF Overview Fourth Quarter 2017 Index Composition NPI NPI - Leveraged Properties Only NFI-ODCE Farmland Properties Timberland Properties Contributors Properties 7,527 3,692 2, Market Value $559.8 B $360.1 B $225.9 B $8.5 B $25.5 B Inception Date 1978 Q Q Q Q Q1 Sold Properties Leverage Unlevered 41.3% 21.4% Unlevered Unlevered Quarterly Return 1.80% 2.28% 2.07% 2.93% 1.52% 1 Year Return 6.96% 8.93% 7.62% 6.19% 3.63% Note: NFI-ODCE returns are gross of fees. 5

6 Total Return Trends by Asset Class Comparison as of December 31, % 20% 18% 16% 14% 12% 4Q Year 10-Year 12.1% 21.8% 10% 8% 6% 4% 2% 1.8% 7.0% 6.1% 2.3% 8.9% 7.3% 2.9% 6.2% 1.5% 4.4% 3.6% 2.1% 7.6% 5.0% 2.5% 8.7% 7.8% 6.6% 8.5% 0% NPI Leveraged NPI NCREIF Farmland NCREIF Timberland NFI-ODCE - gross of fees NAREIT Equity REIT Index S&P 500 Index 6

7 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 Market Value Index Commercial real estate prices are now quite high relative to rents, Yellen said. Now, is that a bubble or is it too high? And there it s very hard to tell. But it is a source of some concern that asset valuations are so high.

8 NPI Total Return End Year with an uptick 4.0% 3.5% 3.0% NPI Total Return 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 8

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10 Annual NPI Return History 30% Total Return Income Return Capital Return 20% 10% 0% -10% -20% -30% Q1 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

11 Property Leverage Ratio for All NPI with Implied Interest Rate 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 14% 12% 10% 8% 6% 4% 2% 0% Loan-to-Value Ratio Implied Interest Rate Property LTV - All NPI Implied Interest Rate 11

12 Question What will be the best performing asset class in 2018? A. NCREIF Leveraged Returns B. S&P 500 Stocks C. Corporate Bonds D. NAREIT Index 12

13 Annual Real GDP Growth and NPI Total Return 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Real GDP Growth NPI Total Return Annual GDP Growth Annual NPI Total Return Source: U.S. Bureau of Labor Statistics, NCREIF. 13

14 Quarterly Real GDP: Contributions to Growth by Major Component 6% Personal Consumption Business Investment Residential Investment Inventories Exports Imports Government GDP Growth Quarterly Growth, SAAR 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 1Q Q Q Q Q Q Q Q Q Q Q Q 2017 Source: U.S. Bureau of Economic Analysis, NCREIF. 14

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

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

17 NFI-ODCE Fund Flows 4Q Rolling Total as of December 31, 2017 $20.0 Contributions Distributions/Redemptions $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $ 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 ODCE Net Fund Flows ($Bil)

18 NFI-ODCE Fund Flows as Share of Net Real Estate Assets 4Q Rolling Total as of December 31, % Net Flows Contributions Distributions/Redemptions 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 18 4Q 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 NFI-ODCE Fund Flows (% Net RE Assets)

19 NFI-ODCE Net Fund Flows as Share of Net Real Estate Assets with Total Returns 4Q Rolling Fund Flows Share/Annual Returns as of December 31, % 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 25.0% 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% 4Q 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 NFI-ODCE Net Fund Flows (% Net RE Assets) Annual Total Return Net Flows NFI-ODCE Annual Total Return NPI Annual Total Return 19

20 NPI Sale Transactions 1, Q Rolling Sold Properties 4Q Rolling Sales Volume $45 $40 $35 $30 $25 $20 $15 $10 $5 $ Q4 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 2017Q4 Sold Properties Sales Volume ($Bil) Annual Capital Return and Share of NPI Properties Sold 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Capital Return Percent Sold Annual NPI Sales Transactions and Volume 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 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 2017Q4 Capital Return Percent Sold

21 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% QMA Value Weighted Cap Rate Note: Implied Cap Rate Equals Current Quarter NOI Divided by Current Quarter Market Value Multiplied by 4. 21

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23 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% Q1 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 Source: Federal Reserve Bank of St. Louis (FRED), NCREIF.

24 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% 24

25 NPI Capitalization Rates: Trend by Property Type Apartment Industrial Office Retail 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% QMA Cap Rate

26 NFI-ODCE Fund Discount Rates: Trend by Property Type 10-Year Holding Period 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 2011-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 Discount Rate 2016-Q Q Q Q Q Q4 Apartment Industrial Office Retail Note: Data excludes two NFI-ODCE funds. Source: Altus, NCREIF. 26

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

28 NCREIF Indicators: Market Value Index (MVI) MVI Level Annual Change 20% 15% 10% 5% % -5% -10% % -20% -25% 50-30% MVI by Property Type Apartment Industrial Office Retail 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 Note: The Market Value Index (MVI) is an equal-weighted index and excludes expansion capital expenditures. 28

29 Question When will the Market Value Index (MVI) peak for this cycle? A. Peaked in 2017 B C D or later 29

30 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% 1.57% 2.17% 1.5% 1.0% 0.5% 1.86% 1.63% 1.59% 2.84% 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% 1.83% 1.75% External Internal 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1.76% 1.82% Joint Venture Wholly Owned 30

31 NPI Total Returns: Top 10 Markets by Market Value Top 10 Markets versus All Others 2.5% 2.0% 1.5% 1.0% 2.00% 1.63% 0.5% 0.0% Top 10 Markets Other Markets 3.0% Top 10 Markets MV ($Bil) New York City $ Los Angeles $ Washington DC $ Chicago $ San Francisco $ Seattle $ Dallas $ Boston $ Houston $ Denver $ Quarterly Total Return: Top 10 and NPI 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Seattle Denver Washington DC Dallas San Francisco NPI Chicago Los Angeles New York City Houston Boston 31

32 Current Quarter Basis Point Total Return Impact by Metro Apartment Office New York Chicago Seattle Washington DC New York Boston Washington DC Seattle Dallas Houston Industrial Retail Los Angeles Inland Empire Chicago New York Tacoma New York Houston Portland Chicago Dallas 32

33 NPI Total Returns by Property Type: 4Q 2017 Income Capital Total 3.5% 3.3% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 1.1% 0.6% 1.6% 1.9% 1.0% 2.1% 1.7% 1.2% 1.2% 1.1% 0.5% 0.1% 1.3% 0.0% -0.5% -1.0% -1.5% -1.0% Apartment Hotel Industrial Office Retail 33

34 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% 1.15% 2.05% Office by Location/Value 2.45% 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% 3.16% Local Wh. (<= 250K SF) Retail by Type 3.49% Regional Wh. (250K-500K SF) 3.17% National/Bulk Wh. (500K+ SF) 3.46% Other Industrial 2.5% 1.6% 2.0% 1.4% 1.2% 1.5% 1.0% 1.0% 0.5% 0.0% 2.00% 1.73% 1.47% CBD Suburban > $100M Suburban <= $100M 0.8% 0.6% 0.4% 0.2% 0.0% 1.11% 1.50% Super Reg./Reg. Neighborhood/Comm. 1.38% Other Retail 34

35 NPI Total Returns by Property Type: Annual Returns Over Last Five Years 18.0% 4Q 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 35

36 Question What will be the best performing property sector in 2018? A. Apartment B. Hotel C. Industrial D. Office E. Retail 36

37 NPI Net Operating Income Growth Rolling Four Quarters 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 3.8% 7.1% 4.7% 5.3% 5.2% 1.0% 0.0% 4Q Q Q Q Q

38 NPI Net Operating Income Growth Trends by Property Type 15% 10% 5% 0% -5% -10% Q Rolling NOI Growth Apartment Industrial Office Retail 38

39 NPI Rental Income Growth Rolling Four Quarters 6.0% 5.0% 4.0% 3.0% 5.8% 2.0% 3.2% 3.7% 4.4% 3.5% 1.0% 0.0% 4Q Q Q Q Q

40 NPI Rental Income Growth Trends by Property Type 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Q Rolling Rent Growth Apartment Industrial Office Retail 40

41 NFI-ODCE Average Projected Market Rent Growth by Property Type 10-Year Holding Period 3.8% 3.6% 3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% 2011-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 Rent Growth 2016-Q Q Q Q Q Q4 Apartment Industrial Office Retail Note: Data excludes two NFI-ODCE funds. Source: Altus, NCREIF. 41

42 Question Which property type will have the highest NOI growth in 2018? A. Apartment B. Industrial C. Office D. Retail 42

43 Recent Occupancy Rate Trends 100% NPI Occupancy Last Five Years 95% 90% 90.6% 91.9% 92.9% 93.2% 93.6% 85% Occupancy Last Five Quarters 95% 94% 93.2% 93.2% 93.4% 93.6% 92.9% 93% 92% 91% 90% 89% 88% 87% 86% 85% 4Q Q Q Q Q % 4Q Q Q Q Q

44 NPI 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% 85.0% 44 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

45 Occupancy Rate Trends by Property Type Apartment Industrial Office Retail 45 90% 91% 92% 93% 94% 95% 96% % 87% 88% 89% 90% 91% 92% 93% 94% 95% % 86% 88% 90% 92% 94% 96% 98% % 83% 84% 85% 86% 87% 88% 89% 90%

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

47 NCREIF Indicators: Total Capital Expenditures as Share of NOI by Property Type Apartment Industrial Office Retail 65% 55% 45% 35% 25% 15% 5% 47 4Q 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

48 NCREIF Indicators: Capital Expenditure Detail as Share of NOI by Property Type Apartment Industrial 40% 35% 30% 25% 20% 15% 10% 5% 0% Leasing Com. TI's Bldg Imp. 35% 30% 25% 20% 15% 10% 5% 0% Leasing Com. TI's Bldg Imp. Office Retail 48 4Q 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 % Leasing Com. TI's Bldg Imp. 20% 25% 15% 20% Leasing Com. TI's Bldg Imp. 15% 10% 10% 5% 5% 0% 0% 4Q 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

49 Question What will the annual NPI total return be for 2018? A. Below 5% B. 5%-to-7% C. 7%-to-9% D. Above 9% 49

50 Summary Fundamentals should support solid, although below average real estate returns Cap rate spreads near long-term averages could insulate values from rising interest rates Rental income and NOI growth are above average overall, although retail and apartment slowing Overall occupancy at historic high driven by industrial 50

51 Upcoming NCREIF Events NCREIF Winter Conference 2018 Scottsdale, AZ Scottsdale Resort at McCormick Ranch March (Two Certification Program Courses offered prior to start of conference) NCREIF Summer Conference 2018 Charlotte, NC June Professional Certificate Program in Institutional Real Estate Dallas, TX Southern Methodist University July Visit for more information 51