The big winner in commercial real estate property performance continues to be retail properties, which on a total return basis (cash flow and property value change) has averaged a phenomenal 10.12 percent per year since 2000, including 2009 when the return was -11.4 percent. Retail property return shot up to 12.29 percent for the 12-months ending December 2013. And given where retail sales are heading, it’s a positive outlook from here.
The data for this analysis comes from the National Council of Real Estate Investment Fiduciaries (NCREIF), which is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. NCREIF reports accurate, unbiased return metrics, with a framework in place that assures consistency over time and across investors. To read more about NCREIF click http://www.ncreif.org/index.aspx
NCREIF’s return assumptions include:
- Properties are acquired through all-cash transaction (no loans)
- Since the returns are within tax-free investments, no taxes are paid (except property taxes). There are no long-term gains taxed at the time of sale, and the investors do not depreciate the property.
- Returns are calculated quarterly and include both the net-cash flow from the property and the change in the property value. Specifically, total return is the net operating income from the property, less property management fees, plus the change in value.
For details and related questions click http://www.ncreif.org/faqsproperty.aspx
Within the NCREIF space, more than 7,000 commercial properties are tracked with a combined market value of $353.9 billion. This data series is recognized as a top proxy for U.S. commercial real estate returns and performance.
The annualized trailing 12-month retail property returns are included in the following table since 2000, and in the graph commencing 2002, based on the NCREIF data series.
While the historical long-term performance is attractive, the latest retail sales report continues that trajectory. Retail sales for March 2014 rose an estimated 1.1 percent – the largest gain since September 2012, according to the Commerce Department. The following graph shows the Real (inflation adjusted) retail and food service sales since January 2000, on a seasonally adjusted basis. The latest recession significantly retracted retail and food service spending, but has now since recovered.
This entire series supports why many businesses, institutions and investors continue to over weight in commercial real estate.
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