Second Quarter 2018NCREIF Indices Review

August 14, 2018

Panelist Overview

Jeff Fisher

NCREIF Data, Research & Education Consultant

Hans Nordby

Managing Director

CoStar Portfolio Strategy

Special thanks to Kevin Scherer, NCREIF Consultant for Slides from NCREIF Analytics

Disclaimer

Today we will be presenting what we see in the NCREIF data, trends and changes; all comments about future expectations are the personal views of the speakers (and could be wrong!) and not a reflection of a NCREIF opinion or forecast.

Overview

• NPI return up for quarter - highest return since 2nd quarter of 2016

• Volatility of total returns continue at a historic low

• Industrial still the leader of the Pac

• But retail showed some recovery this quarter

• Occupancy holding near its 15-year high

• Rental growth holding up

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NCREIF OverviewSecond Quarter 2018 Index Composition

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NCREIF Property Index

(NPI)

NPI Leveraged Property Index

NFI-ODCE (Fund Index – Gross of

Fees)

Farmland Properties

Timberland Properties

Leverage Unlevered 42% 22% Unlevered Unlevered

Quarterly Return

1.8% 2.1% 2.0% 1.1% 0.5%

1 Year Return

7.2% 8.5% 8.4% 6.6% 3.6%

1.7% 2.0%1.3% 0.9%

2.2%

-6.7%

-0.8%

7.1%8.3%

7.1%

3.7%

8.1%

-1.1%

14.0%

6.1% 6.5%

12.1%

4.0%5.1%

6.9%

9.5%

-10%

-5%

0%

5%

10%

15%

20%

NPI NPI Levered Farmland Timberland NFI-ODCE NAREIT S&P 500

Tota

l Re

turn

3/31/2018 1-Yr 10-Yr Avg

Total Returns by Asset Class

Chart: 260

LAST QUARTER

Leading Indicator, Or Noise?

REIT vs. NCREIF Capitalization Rates

REITs Look Cheap

REIT vs. Private Market Current Yield Spread

Question

• What will be the best performing asset class in 2018?• A. NCREIF Leveraged Returns

• B. Farmland

• C. S&P 500 Stocks

• D. Corporate Bonds

• E. NAREIT Index

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13Note: The Market Value Index (MVI) is an equal-weighted index and excludes expansion capital expenditures.

Prices Still Rising

Another New High

YTD Transaction Volume Is 9% Lower Than 2017

Year/Year Transaction Volume

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0

100

200

300

400

500

600

700

800

900

1000

1998 2001 2004 2007 2010 2013 2016

Vo

lum

e (M

il)

Num

ber

of S

ales

Number of Sales Transaction Volume

NPI Transaction Volume

Annual

Chart: 258

Retail And Office Dragging Transaction Volume

YTD Year/Year Transaction Volume By Property Type

Question

• When will the Market Value Index (MVI) peak for this cycle?• A. Peaked this quarter

• B. Before end of 2018

• C. 2019

• D. 2020 or later

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Exposure To Industrial Drives OutperformanceDifference Between NCREIF Returns With And Without Industrial

Sources: NCREIF; CoStar Portfolio Strategy As of 18Q2

(1.0%)

(0.5%)

0.0%

0.5%

1.0%

1.5%

95 97 99 01 03 05 07 09 11 13 15 17

NCREIF Return With Industrial - Return Without

Current Quarter Basis Point Total Return Impact by Metro

Apartment Industrial

Office Retail

22

0.00

1.00

2.00

3.00

4.00

Los Angeles Riverside New York Oakland AnaheimSantaAna

Irvine

Return Impact (BP) Industrial

Deliveries Weighing Heavily on Washington, DC Office Returns

Washington, DC Office Total Returns and Supply

Metro

Ptype

9/30/201512/31/2015

3/31/20166/30/20169/30/2016

12/31/20163/31/20176/30/20179/30/2017

12/31/20173/31/20186/30/2018

Source: CoStar Portfolio Strategy As of 18Q2

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Deliveries

(2%)

(1%)

0%

1%

2%

3%

4%

5%

6%

7%

8%

13 14 15 16 17 18

Income Return Appreciation Return Total Return

Annual Returns Annual Deliveries (SF)

Question

• What will be the best performing property sector in 2018?• A. Apartment

• B. Hotel

• C. Industrial

• D. Office

• E. Retail

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Question

• What will cap rates be for the nation by the end of 2018?• A. Below 4%

• B. 4% to 5%

• C. 5% to 6%

• D. Above 6%

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Office: Significantly More Demand Growth In 4&5 Star Product

Cumulative Net Absorption Since 2010 Nationally

3/31/20056/30/20059/30/2005

12/31/20053/31/20066/30/20069/30/2006

12/31/20063/31/20076/30/20079/30/2007

12/31/20073/31/20086/30/20089/30/2008

12/31/20083/31/20096/30/20099/30/2009

12/31/20093/31/20106/30/20109/30/2010

12/31/20103/31/20116/30/20119/30/2011

12/31/2011

Source: CoStar Portfolio Strategy

Note: Includes 54 major U.S. metros As of 18Q2

0

100

200

300

400

500

600

10 11 12 13 14 15 16 17 18

4 & 5 Star 3 Star And Below

Cumulative Net Absorption Since 2010 (Millions SF)

Absolute (SF) %

4 & 5 Star 376,184,577 15.7%

3 Star And Below 207,559,499 4.3%

Demand Growth Since 2010

Office: The Flight To High-Quality Office Is Widespread

Net Absorption By Building Quality

Include?

1

1

1

1

1

1

1

1

2

3

4

5

6

7

8

9

Source: CoStar Portfolio Strategy As of 18Q2

(2)

(1)

0

1

2

3

4

5

6

7

Ne

w Y

ork

San

Jo

se

Da

llas -

FW

Sea

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Washin

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San

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Austin

Ch

arlo

tte

Port

land O

R

Bosto

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Mia

mi

4 & 5 Star 3 Star 1 & 2 Star Net Absorption

Four-Quarter Net Absorption (Million SF)

2Q 2018

Retail: 2018 Announcements Outpacing Record Setting 2017

Announced Store Closures By Square Feet

Sources: Business Insider; Clark Howard; ICSC; SEC Filings; RIS; CoStar Portfolio Strategy As of May 2018

87 MSF 76 MSF

105 MSF

95 MSF

0

20

40

60

80

100

120

2008 2016 2017 2018

Q1 Q2 Q3 Q4

Retail Space Announced For Closure (MSF)

Office Rents Rolling Up 20%+ To Market

Difference Between Current Office Market Rent And Rent Five Years Prior

3/31/20056/30/20059/30/2005

12/31/20053/31/20066/30/20069/30/2006

12/31/20063/31/20076/30/20079/30/2007

12/31/20073/31/20086/30/20089/30/2008

12/31/20083/31/20096/30/20099/30/2009

12/31/20093/31/20106/30/20109/30/2010

12/31/20103/31/20116/30/20119/30/2011

12/31/20113/31/20126/30/2012

Source: CoStar Portfolio Strategy As of 18Q2

Note: Assumes five-year lease term with no rent steps

(10%)

(5%)

0%

5%

10%

15%

20%

25%

07 08 09 10 11 12 13 14 15 16 17 18

Difference Between Current Office Market Rent And Rent Five Years Prior

Apartment: Workforce Segment Outperforms

Asking Rent Growth By Building Rating (National Index)

2.002.002.002.002.002.002.00

12/31/20013/31/20026/30/20029/30/2002

12/31/20023/31/20036/30/20039/30/2003

12/31/20033/31/20046/30/20049/30/2004

12/31/20043/31/20056/30/20059/30/2005

Source: CoStar Portfolio Strategy As of 18Q2

Note: The National Index is an aggregation of 54 major U.S. markets

(2.5%)

2.1%

3.2%3.6%

1.7%

(2.3%)

1.8%

3.1%

4.7%

3.1%

(2.3%)

1.2%

2.1%

3.8%

3.3%

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

5%

6%

2008-09 2010-11 2012-13 2014-15 2016-17

4 & 5 Star 3 Star 1 & 2 Star

Average Annual Rent Growth

Industrial: Rents Have Not Peaked Yet

Bulk-Regional Asking Net Rents - Last Cycle, Today, & 2022

123456789

101112151719212223272821222324252627

Source: CoStar Portfolio Strategy As of 18Q2

$3

$6

$9

$12

$15

Prerecession Max/Recession Min Range Today 22Q4

Rent ($/SF)

Question

• Which property type will have the highest NOI growth in 2018?• A. Apartment

• B. Industrial

• C. Office

• D. Retail

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Why Industrial: Low Capex; High Cash Yields

NCREIF Cap Rates, Capex & Cash Yields

Sources: NCREIF; CoStar Portfolio Strategy As of 18Q2

Rolling 4 Quarter Cap Rate - Capex = Cash Yield

4.3%

-1.0%

3.3%

4.6%

-2.6%

2.0%

4.6%

-1.8%

2.8%

4.9%

-1.4%

3.5%

Cap Rate Capex Cash Yield

Apartment Office Retail Industrial

Apartment: High End Rent Growth Remains Scarce

One Bedroom Apartment Rent Growth By Decile

1 2 3 4 5 6 7 8 9 10

08Q2 2.5% 2.3% 2.2% 2.3% 2.1% 2.0% 2.1% 2.2% 2.3% 2.4%

09Q2 (1.2%) (1.3%) (1.1%) (1.8%) (1.5%) (1.9%) (1.9%) (2.1%) (2.5%) (2.6%)

10Q2 (1.2%) (1.5%) (1.7%) (1.6%) (1.5%) (1.7%) (2.1%) (1.8%) (2.2%) (2.6%)

11Q2 1.9% 1.9% 1.8% 1.9% 1.9% 1.9% 1.7% 1.7% 1.7% 1.3%

12Q2 3.1% 3.0% 2.7% 3.0% 2.7% 2.7% 2.6% 2.6% 2.3% 2.1%

13Q2 4.7% 4.4% 4.1% 4.1% 4.1% 3.9% 3.4% 3.5% 3.2% 2.8%

14Q2 4.2% 4.0% 3.6% 3.4% 3.5% 3.2% 2.9% 2.7% 2.7% 2.2%

15Q2 7.7% 7.1% 7.4% 7.0% 6.6% 6.4% 6.3% 5.8% 5.2% 3.4%

16Q2 5.9% 5.9% 5.8% 5.6% 5.5% 4.7% 4.4% 4.0% 3.1% 1.6%

17Q2 4.9% 4.6% 4.2% 4.1% 3.3% 3.3% 2.8% 2.5% 2.0% 0.7%

18Q2 3.8% 3.9% 3.7% 3.8% 4.0% 3.4% 3.3% 3.4% 2.9% 1.9%

"B" Properties "B+/A-" Properties "A/A+" Properties

Source: CoStar Portfolio Strategy As of 18Q2

*Deciles established at individual metro level

Building Deciles

"C/D" Properties

Question

• What will the annual NPI total return be for 2018? (Current rolling annual return 7.1%)• A. Below 5%

• B. 5%-to-7%

• C. 7%-to-9%

• D. Above 9%

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Summary

• Returns below average but holding steady although slight uptick this

quarter

• But widening disparity of returns across property sectors

• Cap rate spreads near long-term averages could mitigate pressure on

cap rates from interest rate increases

• NOI growth good for industrial; moderate for office and apartment but

negative for retail

• Overall occupancy at historic high driven by industrial

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Upcoming NCREIF Events

NCREIF Fall Conference 2018Orlando, FLNovember 6 – 9

Data Submission TrainingWebinarTuesday October 9th 1pm CST

Visit www.ncreif.org for more information

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