Third Quarter Real Estate Property Values Take a Dip

11/1/2011 | By Carisa Chappell

Third Quarter Real Estate Property Values Take a Dip
Although third quarter returns from commercial real estate investment properties remained positive, they were down from the previous three-month period, according to data released by the National Council of Real Estate Investment Fiduciaries (NCREIF).

The NCREIF Property Index's (NPI) total return for the third quarter of 2011 was 3.30 percent, including an income return of 1.46 percent and a 1.83 percent return on capital. This reflected a total return that was 64 basis points lower than last quarter.

Calvin Schnure, NAREIT's vice president of research and industry information, said the data illustrates the divergence between near-term and long-term fundamentals in commercial real estate.

The near-term outlook isn't strong, Schnure said. While commercial property prices have stopped falling and actually edged up slightly, he said they are still well below the highs witnessed in 2007 before the financial crisis hit.

"Prices did stabilize and have made up for their lows," Schnure said. "However, we don't expect prices to get back to their pricing peak until the economy is back on its feet and consumer spending is back."

For the time being, low occupancy rates mean landlords have little pricing power, according to Schnure. As a result, they've been offering concessions on lease renewals.

Schnure said the longer-term outlook is more positive, which he attributed to the lack of new property development in the pipeline across most commercial real estate sectors. With new construction at its lowest point in a decade, filling up the supply of available space will require multiple years once demand ramps back up.

"Construction of office buildings is 58 percent below its pre-recession peak," Schnure explained. "Retail is off 66 percent, and apartments are down an astounding 73 percent."

The growing demand for multifamily housing is already benefiting the supply-constrained apartment sector. Apartments outperformed all other sectors in the third quarter, followed by the retail and industrial sectors.

NCREIF's Open-end Diversified Core Equity Index (ODCE), a sub-index comprised only of those properties in the NPI owned by open-end funds, had similar third quarter results to the NPI. The ODCE total return before fees for the third quarter was 3.52 percent, compared to a second quarter return of 4.62 percent.

With the unemployment rate hovering above 9 percent and the economy continuing its slow recovery, Schnure cautioned against expecting an immediate rebound in property values. "But buildings are a long-term asset, and the medium- and long-tem view for commercial properties is decidedly better," he said.