The second installment in the commercial real estate returns series is on apartments. In my presentations this year I have talked about mega themes, one being that, because of the housing bubble and revised more stringent mortgage underwriting standards, many people that graduated from trade school, college or universities in last four years and in the coming two to four years will have a greater tendency to be renters rather than homeowners. That positively impacts rents and ultimately profitability of multi-family properties.
So where do we get the data?
The National Council of Real Estate Investment Fiduciaries (NCREIF) 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 second of five for commercial properties using NCREIF data).
This series 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 apartment properties was 8.56 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 multifamily properties held in NCREF-member investments.
The graph below shows this return on a TTM basis.
The current annualized returns on a TTM basis in the latest quarter was an impressive 12.64 percent.
The bottom line is that, just like industrial properties, apartments have recovered from the plunge in values in 2009.
A second mega theme in speeches this year is that it is time to overweight in real estate. And the 12.64 percent annual return proves that point.
If you questions—just email back.
Ted