Industrial Property Returns — National Council of Real Estate Investment Fiduciaries
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One of the first things that typically happens at the physician’s office is a heart and blood pressure check. I believe that for many real estate markets that same check for overall health can be completed by looking at the performance of industrial properties. These vary from mom-and-pop office warehouses to massive storage and manufacturing buildings.
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. (This blog is first of several for commercial properties using NCREIF data).
This series includes both cash flow and property value change for the quarter. Assumptions include (more details are available 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 industrial properties was 8.18 percent. This includes both the net operating income after deducting property management fees plus value change. The graph below shows this return on a TTM basis.
After peaking at almost 20 percent in 2006, and falling 25 percent in the trough of 2009, current annualized returns on a TTM basis in the latest quarter were 11.7 percent.
The bottom line is that industrial properties have recovered from the plunge in values in 2009.
If you have questions—just email back.