NCREIF review and outlook: Q1 2022

Stellar private real estate returns continue; but poised to decelerate

US private real estate returns remained very strong in the first quarter of 2022, which brought trailing-year returns to levels not seen in 40 years. Industrial and apartment sectors continued to lead, while office and retail continued to lag. The 1Q returns do not reflect the rapid changes in the US macro-economic environment that started in the first half of 2022. It is almost certain returns will slow dramatically in the coming quarters, but the timing and magnitude of the shift to lower returns is highly uncertain.

This note provides some details on the performance of the NPI and ODCE indices, along with views on the outlook for US private real estate returns informed by LaSalle’s market activity, valuations, and the PREA Consensus forecast.

Highlights from the 1Q data releases include:

• Quarterly total returns appear to have peaked at the end of 2021.  The NPI total return of 5.3% in the first quarter was down from 6.1% in the fourth quarter, but still the third consecutive quarter with a quarterly return over 5%.  The trailing-year return is up to 21.9%, the highest since the first quarter of 1980 (another time when inflation was elevated).
• The quarterly income return of 0.99% was below 1% for the first time ever, bringing the trailing-year income return to 4.18%.  Appreciation returns of 4.34% brought the trailing-year appreciation to 17.2%, the highest in the history of the NPI (dating to 1978).
• Property type trends remained consistent with past quarters, with industrial leading by a wide margin, apartments also delivering strong performance, while office and retail lagged significantly.  This continues to highlight the importance of sector selection in driving relative performance.
• The ODCE quarterly gross total return of 7.37% was down 60 bps from the record level in the fourth quarter.  This was comprised of a 0.93%income return and a 6.44% appreciation return.  The trailing-year gross ODCE return is up to 28.5%; 27.3% on a net basis, both all-time highs.
• 1Q returns are based on income earned in the first quarter and appraisals completed over the course of the quarter.  These returns do not reflect the negative macro news that started to emerge in the first half of 2022.