Commercial real estate continued to top historical averages in Q2

Total returns for institutional-quality real estate remained exceptionally high in the second quarter of 2022, though all sectors showed some degree of moderation according to the latest data from the National Council of Real Estate Fiduciaries (NCREIF).

The NCREIF Property Index (NPI) tracks the investment performance of thousands of commercial properties. Based on the NPI data, the quarterly annualized total return for the composite of all CRE properties slipped to 13.6% for Q2, down from 23.1% in the first quarter of 2022, but still above the 10-year total return of 9.7%. That is to say, returns are moderating as we come down from the explosive economic growth experienced in 2021 as the economy recovered following the COVID-19 pandemic.

This 13.6% quarterly annualized return consists of 3.9% from income and 9.4% from appreciation.

Within commercial real estate (CRE), the apartment sector garnered the second-highest return in the second quarter—behind only industrial—at 16.4% quarterly annualized. This is below last quarter’s value of 22.7%, but still well above the sector’s 10-year return of 9.4%. Strong rent growth and high demand from investors for multifamily properties continued to bolster appreciation and income returns during 2Q.

The office sector, plagued by an uncertain future thanks to the increased prevalence of remote work, suffered negative appreciation in Q2, though income returns remained solid due to the long-term leases predominant in the sector. Additionally, while the industrial sector came out on top in quarterly returns, those returns dropped by almost half from the previous quarter.

Looking towards other investment types, it is notable that the 1-year annualized return in CRE (21.5%) easily outperformed REITs and the S&P 500, both of which were in negative territory in the face of market turmoil. CRE returns are collected at a lag, so the comparison is not exactly apples-to-apples. However, it is clear that CRE is providing a safe haven for capital in a period of macroeconomic uncertainty.