Demand for retail real estate is a pure function of how much consumers are spending. Period. The following graph shows total U.S. retail and food service spending in real terms (adjusted for inflation). Although retail sales have yet to reach the peak seen prior to the 2008-2009 recession, retail properties did not decline in value as great as other commercial properties.
So where do we get the data?
The National Council of Real Estate Investment Fiduciaries is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. They report accurate, unbiased real estate return data. NCREIF employs a framework of reporting requirements assuring consistency in return analyses.
One of the many data series provided is the NCREIF Property Returns Index reporting quarterly performance for more than 7,200 commercial properties having a combined value in excess of $310 billion. This series is perhaps the best proxy for U.S. commercial real estate performance. For retail properties, data commencing Q2 1978 can be viewed here.
This series from NCREIF includes both cash flow and property value change for the quarter. Assumptions include (and for more details click here):
- Each quarterly return assumes the property was purchased at the beginning of the quarter and sold at the end of the quarter with all cash flow going to the investor (Net Operating Income – Capital Expenditures)
- Properties are purchased with cash—no loans
- There are no depreciation schedules for tax purposes (tax-exempt investments), nor any capital gains tax implications
Since 2000, the average trailing twelve months (TTM) return on retail properties was 9.89 percent. This includes both the net operating income after deducting property management fees plus value change. The table shows the trailing 12-month returns for retail properties held in NCREF-member investments. In comparison, hotels averaged 6.3 percent in the same period, apartments 8.56 percent, offices 7.68 percent and industrial properties 8.18 percent.
The graph below shows this return on a TTM basis. The annualized return on a TTM basis in the latest quarter was an impressive 12.8 percent.
So what’s the potential for retail properties in the future? I believe the term is spectacular—and the cash to drive that is already in consumers’ pockets, purses and bank accounts. All it is going to take is a revival in consumer confidence. The following graph shows M1 (which is defined as cash, demand deposits and checking accounts). In essence, these can became cash in minutes with no discount. They are yielding zero currently, so the opportunity cost is minimal. Since mid-2008, M1 has increased more than 60 percent. All is it going to take to get consumers moving (and buying and spending this massive M1 increase) is consumer confidence. And when that happens, retail booms.
Retail real estate is doing well with great upside potential. Without question, it is time to overweight in real estate.
If you have questions—just email back.