Private real estate appreciation moves negative as re-valuation starts

US private real estate returns weakened considerably in 3Q 2022 as higher interest rates continued to have a major impact on market pricing and appraised values. This trend is expected to continue in the remainder of 2022 and into the opening quarters of 2023. This is leading to a dramatic slowdown in returns from the record levels seen less than a year ago.    

Returns in the third quarter showed negative appreciation, with total returns remaining positive for both the NPI and ODCE. The slowdown in returns was most significant for industrial, with apartments delivering the highest returns. Looking ahead, the dominant theme in sector performance is expected to be the under-performance of offices.  

This note provides details on the third quarter performance of the NPI and ODCE indices, summarizes the outlook for future returns, and provides some information regarding insights from the first release of data related to the new NCREIF subtypes.

Highlights from the 3Q data releases include:   

• The quarterly total NPI return declined 260 bps from 2Q to 0.6%. The 3Q return was a 0.93% income return (an all-time low), and the appreciation return went negative for the first time since 3Q 2020 at -0.37%.
• The trailing-year return declined more than 500 bps quarter-over-quarter to 16.08%, which is still high relative to history.
• Returns for all property types were down from the previous quarter, with industrial seeing the greatest decline. For the first time since 1Q 2016, industrial was not the highest-returning property type.
• The ODCE value-weighted quarterly gross total return of 0.52% was down 430 bps from the second quarter. Appreciation turned negative at an index level and the income return continued to fall to 0.81%, an all-time low. Mark to market on leverage was a positive as interest rates rose, but negative appreciation caused leverage to be an overall negative to returns.