Trepp | The Big Picture: Big Property Index Has Another Positive Showing

By now, you’ve read countless stories and headlines that assure you that the commercial property market has turned the corner. The worst is past. You might have read some of that here.

There are numerous data points to indicate that to be true. While CMBS delinquency rates continue to inch higher, albeit at a much slower pace, that metric is a lagging indicator. A loan goes delinquent after its collateral has lost a tenant or otherwise suffered a drop in cash flow, not before. The slowdown in the growth in delinquencies could be a positive sign.

Here’s another: the National Council of Real Estate Investment Fiduciaries’ Property Index posted a 1.22% total return in the third quarter, marking four straight quarters of positive numbers. That compares with the index’s 1.23% return in the second quarter and brings total returns for the past four quarters to 4.72%.

The index, which tracks 12,923 institutionally owned properties valued at $899 billion, peaked during the second quarter of 2022, when it provided a 5.32% total return. Returns shifted south since then and started turning positive early last year.

The latest total return figure, which is unleveraged, is comprised of a 0.06% return from value appreciation and 1.16% return from income. Those figures in the second quarter were 0.03% and 1.19%, respectively. Contrast that with last year’s fourth quarter, when properties that comprise the index saw a 0.24% decline in value. Income provided a 1.17% return. Appreciation returns are after capital expenditures are deducted.

Every property type represented in the index posted positive numbers, with seniors properties posting a robust 2.88% total return. It was followed by hotels, with a 2.12% return; other property types, at 1.78%, and self-storage, at 1.68%. Apartment properties posted a 1.44% return, followed by retail at 1.31% and industrial at 1.03%. The office sector, where values continue to decline, recorded a 0.9% total return, thanks to the 1.39% of income that was generated.

Despite the positive numbers, wariness should be key. Capital Economics warns that property values could still decline. It accurately noted that property values in the NCREIF index, which are reliant on appraisals, were determined using a 4.6% capitalization rate. That’s for properties that were not sold. Those that sold fetched prices resulting in a cap rate of 5.62%. Capital Economics noted that the spread between cap rates for sold and unsold properties has been normal since 2007. But the latest gap is wider than the norm.

The London research company recently developed its Capital Value Lead Indicator, which predicts that property values will increase slightly through the end of the year. But values will decline slightly early next year. It warned not to hold your breath for a real recovery in property markets as valuations can remain at risk.

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