NAREIM DIALOGUES FALL 2016
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Exhibit III: Income Return as % of Total:
Quarters Before Recessions and Current
Quarter
0 = Ending Quarter with Negative Capital Return
or Current Quarter
That said, the exhibit also suggests that we don't
get much warning before there is a sudden increase
in the portion of return from income due to a
combination of price increases grinding to a halt and
cap rates rising because investors now require a
greater return from income. So we should keep our
eye on what the data is telling us along with signs as
to where the economy is headed. Big moves in the
market are generally due to swings in in economic
indicators such as the GNP and employment growth
as we see in Exhibits IV and V. These exhibits
suggest that as long as GNP and employment
growth continue to be healthy even if at a more
moderate pace, commercial real estate, especially
investment grade as represented by the NPI, should
continue to deliver acceptable risk-adjusted returns.
Although higher interest rates accompanied by
moderate inflation may be on the Fed's radar screen,
at current occupancy levels for CRE, inflation is
likely to result in higher rents and pressure on
replacement costs and may not put upward
pressure on cap rates.
Readers are encouraged to continue to monitor
indices like the NCREIF NPI and Moody's RCA CPPI
in addition to forecasts from economists of GNP
and employment growth to see signs of where the
market is headed.
Exhibit V: NCREIF Returns vs. Employment Growth
Exhibit III: Income Return as % of Total: Quarters Before
Recessions and Current Quarter
