Second Quarter 2019NCREIF Indices Review
August 15, 2019
Panelist Overview
Jeff Fisher
NCREIF Data, Research & Education Consultant
Mary Ludgin
Senior Managing Director, Head of Global Research, Heitman
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 not a reflection of a NCREIF opinion or forecast.
Overview
• Returns for all sectors up except retail
• Market value index rose again this quarter (so didn’t peak last quarter)
• Industrial still the leader of the pack although down slightly from last quarter
• Retail returns return to negative territory after a reprieve last quarter
• Cap rates manage another all time low (four quarter moving average)
• Occupancy continues near all time high
4
Returns for all asset classes well below historic levels.
Question
• What will be the best performing asset class for remainder of 2019?• A. NCREIF Leveraged Returns
• B. Farmland or Timberland
• C. S&P 500 Stocks
• D. Corporate Bonds
• E. NAREIT Index
6
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2004 2006 2008 2010 2012 2014 2016 2018
Income Return Appreciation Return Total Return
NPI Property Returns
Quarterly
Chart: E-001-1907
Unusual for capital return to be less than income return this long without going negative.
NPI
ODCE Retail even more negative
Retail
Write Ups vs. Write Downs based on Market Value
Regional Malls the only negative
0%
2%
4%
6%
8%
10%
12%
14%
16%
2012 2013 2014 2015 2016 2017 2018 2019
Tota
l Ret
urn
s
NPI Index Apartment Industrial Office Retail
NPI Property Total Returns by Property Type
Annual
Chart: C-001-1907
NOI Growth: Reversal of Historical Relationships
15
Source: NCREIF; Heitman Research
Retail
Apartment
Industrial
Office
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
SAME-STORE NOI TRENDS BY PROPERTY TYPEUS NCREIF PROPERTIES 2000-2019 (Q2)
Year-Over-Year % Change
Long-Term Average NOI Growth
Apartments: 3.6%Retail: 3.1%Office: 2.4%Industrial: 2.3%
Shopping Center Sales Tough Comparisons Going Into 2019
1.4%
2.1%
2.9%
4.0%3.9%
4.4%
4.2%
4.9%
4.4%4.5%4.6%
5.2%
5.7%
4.4%4.4%
3.7%
4.1%
3.7%3.9%
3.4%3.2%
2.2%
2.5%2.6%
1.8%
3.4%
2.1%
2.5%
1.9%
2.5%
1.5%1.6%
1.8%1.9%
1.5%
0.8%
3.2%
1.6%
2.8%2.7%
2.2%2.1%
2.6%2.7%
3.3%
3.9%
4.4%
4.8%
3.5%
4.2%
3.6%3.5%
5.6%
4.5%
5.4%
4.7%
3.4%
3.7%
3.1%
1.7%
2.1%
1.0%
2.4%
2.7%
1.6%
2.6%
0%
1%
2%
3%
4%
5%
6%
7%
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J
2014 2015 2016 2017 2018 '19
CENSUS BUREAU SHOPPING CENTER SALES TRENDS¹US 2014-2019 (JUN)
year-over-year % change
Long-Term Average = 3.8%
1. Excludes non-store sales, auto, gas, building materialsSource: U.S. Census Bureau; Heitman Research
16
11.0%
6.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
VACANCY RATE - ALL RETAIL FORMATSU.S. 2000-2019 (Q2)
% Vacant
Retail Vacancy is Well Below Peak Levels
Source: NCREIF; Heitman Research
Despite Elevated Retail Bankruptcies
18
2019 BANKRUPTCIES & ANNOUNCED CLOSURES (% of stores)
Department Stores/
General Merchandise
-11% Shopko* (BK)
-48% Sears (BK)
-52% Kmart (BK)
-68% Barney’s* (BK)
Specialty Apparel
-100% Roberto Cavalli (BK)
-100% TopShop
-100% Dress Barn
-100% Gymboree (BK)
-29% Gap (over 2 years)
-17.5% Chico’s/White House Black Mkt
-5% Victoria’s Secret
-100% A’gaci (BK)
Others
-41% Kona Grill (BK)
-22% Z Gallerie (BK)
-100% Payless Shoes (BK)
-52% Things Remembered* (BK)
-9.2% Claire’s* (BK)
-100% Charming Charlie (BK)
*Private equity-owned
5 7
20 18
711
36 8 10 9
2015
12
0
2
4
6
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
RETAILER BANKRUPTCIESUS 2006 – 2019 (AUG)
Includes retailers with more than $50 million in liabilitiesSource: The Deal, AlixPartners; Reuters, Heitman Research
But Evolution in Shopping Patterns Has Widened Gap Between Winners and Losers
19
6.1%
2.3%
45.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 '19
Overall Vacancy (L)
Centers with less than 20% vacancy (L)
Centers with over 20% vacancy (R)
RETAIL VACANCY RATETOP 50 MARKETS 2006-2019 (Q2)
Source: CoStar; Heitman Research
Part of the Problem is Development:Retail Supply has Often Outpaced Demand
80
60
40
20
0
20
40
60
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
RETAIL ABSORPTION VS. COMPLETIONSTOP 50 MARKETS 1983-2018
Source: CoStar Portfolio Strategy; Heitman Research
millions of square feet
net absorption outpaced net completions
20
Source: CoStar Portfolio Strategy; Heitman Research
net completions outpaced net absorption
E-commerce Isn’t Killing Department Stores, Discounters Are
21
• The combined market share for full-price and discount department stores has held relatively steady in the 20% - 21% range since 2013 but discounters are taking a bigger piece each year
Source: Bureau of Economic Analysis, Telsey Advisory Group, Heitman Research
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
ESTIMATED MARKET SHAREUS 2006 - 2016E
Dept. Stores Off-Price
Amazon Bought Whole Foods for a Reason: Online-only is Expensive
22
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
0
10
20
30
40
50
60
70
80
90
10
0
11
0
12
0
13
0
14
0
15
0
16
0
17
0
18
0
19
0
20
0
COST PER SALE
For illustration only
# of sales
in-store
online
Barriers to entry
online are low…
…but fixed costs
to ship each
order are high
1 “Measuring the Store of the Future” by Doug Stephens, June 20192 “For Direct-to-Consumer Brands, Scaling Isn’t Easy” by Chantal Fernandez, Business of Fashion, Nov 14, 20173 “11 Things Retailers Just Said About The Future Of The Store” by Nikki Baird, Forbes, June 26, 2018
Online customer acquisition costs are increasing
30% increase in cost-per-click on Facebook in 2018
–Merkle1
5x increase in the number of advertisers on Facebook from 2013 to 2017
–Business of Fashion2
Online advertising is the new rent
“… it’s cheaper to open a brick and mortar store than to acquire new customers online.”
– Shilpa Shah, Cuyana Co-Founder3
Innovation and Disruption are Nothing New Among Retailers
23
Nor is Change New in Physical Retail
24
Who’s Closing and Who’s Opening
25
-31%
-21%
-11%
-1%
9%
19%
1999 2004 2009 2014 2019
Co
mp
on
ents
of
Ret
urn
NPI Property Components of Return
Cash Yield NOI Growth Cap Rate Change Other Effects Total Return
NPI Property Components of ReturnAnnual
Chart: C-005-1907
Capital market not moving returns either direction.
Question
• What will the annual NPI total return be for 2019? (Current rolling annual return 6.8%)• A. Below 4%
• B. 4%-to-5%
• C. 5%-to-6%
• D. Above 6%
27
3.8%
4.3%
4.8%
5.3%
5.8%
6.3%
6.8%
7.3%
7.8%
8.3%
2004 2006 2008 2010 2012 2014 2016 2018
Cap
Rat
es
NPI Index Apartment Industrial Office Retail
NPI Property Cap Rates by Property Type
Annual
Chart: C-014-1907
Question
• What will cap rates be for the nation by the end of 2019?• A. Below 4%
• B. 4% to 4.5%
• C. 4.5% to 5%
• D. Above 5%
32
33
Cap Rate
RecessionMarket Value IndexNOI Index
3%
4%
5%
6%
7%
8%
9%
10%
1999 2004 2009 2014 2019
90
115
140
165
190
215
240
265
290
Cap
Rat
es
Mar
ket
Val
ue
and
NO
I In
dex
(199
9=10
0)NPI Property Cap Rates, NOI and Market Values
Chart: C-006-1907
New high.
Question
• When will the Market Value Index (MVI) peak for this cycle?• A. Peaked this quarter
• B. Next quarter
• C. Fourth quarter of 2019
• D. 2020 or later
34
2%
4%
6%
8%
10%
12%
14%
16%
2004 2006 2008 2010 2012 2014 2016 2018
Vac
ancy
NPI Index Apartment Industrial Office Retail
NPI Property Vacancy by Property Type
Annual
Chart: C-017-1907
Question
• What will be the best performing property sector in 2020?• A. Apartment
• B. Industrial
• C. Office
• D. Retail
41
Question
• What will impact US CRE the most for the balance of 2019 • A. Fed changing interest rates
• B. Global slowdown (China, Germany, etc.)
• C. Recession in the US
• D. Trade wars
42
Summary
• Total return for all sectors up slightly except retail
• Market value index reaches new high
• Industrial still the leader of the pack although down slightly from last quarter
• Retail returns return to negative territory – even more negative for ODCE
• Cap rates manage another all time low (four quarter moving average)
• Occupancy continues near all time high
43
Upcoming NCREIF Events
NCREIF Fall Conference 2019Miami Beach, FLNovember 18 – 21, 2019
Visit www.ncreif.org for more information
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