Let me set the scene for you. It’s New Year’s Eve in Portland. I live on a small street; there are six homes including mine. Lucky for me all my neighbors are in real estate and each of them specializes in a different property type. This year we decided to have a progressive house-to-house celebration to ring in the new year.1
The first home on the circuit was the retail property type specialist. I expected a modestly upbeat tone with mandated store closures and a reasonably good holiday season in the rear-view mirror, but there were not a lot of decorations. The hosts looked simply exhausted. NCREIF NPI retail performance for calendar year 2021 was 4.22% (4.71% income offset by -0.47% appreciation). Topics of discussion included retail registering its fifth consecutive quarter (Q4 2021) of positive net tenant demand (translation: more openings than store closings), vacancy dropping to its lowest level in history, and rent growth posting positive change in the range of +2%. Retail fund managers are fielding unsolicited incoming queries from investors looking for relative value.
We then walked over to the home owned by the warehouse property specialist. As we approached the home, the garage door was open and it was overflowing with Amazon boxes. Inside, the punch was flowing, a disco ball was spinning from the ceiling and there was no shortage of caviar. NCREIF NPI 2021 performance was an eye-popping 43.3%, made up of 38% appreciation and 4% income. Including 2021, average annual performance for this property type (going back 30+ years) is around 10%, meaning four years of average annual performance was captured in a single year. Record-breaking tenant demand translates into new developments (running at a pace of over 100M square feet a quarter) that are almost 70% preleased when completed, rents up 7% or more relative to a year earlier, and vacancy in the low-single digits. No one wanted to leave this house!
The office specialist. Unfortunately, this house was dark with a sign on the front door that said they decided to relocate to South Carolina and work from home. The warehouse specialist mentioned interest in buying the home, which would make his two houses adjacent to the retail house, potentially allowing for the creation of a retail/warehouse compound in the future. NCREIF NPI performance for office space in 2021 was reported to be positive, with 6.12% total return, which breaks down to 1.57% appreciation and 4.49% income. Uncertainty related to tenant and investor demand, work-from-home and retrofit costs for aged building stock were all topics of discussion while we walked to the multi-family house.
At the multi-family house, a similar but smaller punchbowl restored the celebratory New Year’s Eve mood – but without the caviar and disco ball. NCREIF NPI total return for 2021 was 19.9% with 15.7% appreciation and 3.8% income -- a solid year of performance. With home prices reportedly up 20%, multi-family landlords were able to drive rent increases across garden style, low-rise and high-rise apartments increasing values for all the multi-family sub-types tracked by NCREIF. Vacancy across single family rental and multi-family dropped to the lowest national average in over 30 years. Population migration, a shortage of inventory and supply chain complications slowing delivery of new homes and multi-family appears to set the stage for continued positive momentum.
The last house, where we planned to end the night, was that of the hotel specialist. Given this person owned city center conference/convention hotels, and wanting to close out the night on a high note, the party ended with discussions about the impending recovery and conferences scheduled for 2022, and how next year we should include the cruise line family, a block over…
Endnotes
NCREIF Property Index – The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market f or investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors – the great majority being pension funds. As such, all properties are held in a fiduciary environment. Source: Bloomberg
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As of February 14, 2022