Commercial Real Estate Returns Hit 16-Year High in the Third Quarter of 2021

Commercial real estate returns soared to the highest level since 2005 in the third quarter of 2021, and inflation-wary investors are increasingly favoring the asset class, according to the latest data and survey of institutional investors, and research by SitusAMC Insights. Senior Director Peter Muoio, PhD, and Jennifer Rasmussen, PhD, Vice President and Head of Thought Leadership and Publications, discussed third-quarter trends and the outlook for the economy, capital markets, and property types at the Quarterly Valuation Trends webinar on December 15.

The webinar draws on major topics from the latest ValTrends report, a quarterly analysis offering proprietary insights and exclusive survey data. For the first time, SitusAMC has made the full report available as a free download. You can access the 28-page report, “A Tale of Two Segments,” here.

Here are a few of the highlights discussed in the webinar:

Commercial real estate is on track for an exceptional year. With the highest capital return in history, NCREIF NPI total returns hit 5.2% in third quarter, the largest level since 2005. By the end of 2021, SitusAMC Insights expects CRE returns of 15.5 percent for the year, and they could reach 17.5 percent. “Even though we see these returns moderating over the next couple of years, we're still looking at double-digit returns in 2022, so (there is) a lot of optimism for the sector,” Rasmussen said.

CRE values held up well during the COVID-19 pandemic. “At the onset of the pandemic, we were getting a lot of feedback from investors saying that returns tanked, and that the private real estate market wasn't writing down property valuations enough,” Rasmussen said. At the time SitusAMC Insights released a white paper suggesting the public markets were trading on sentiment amid a dearth of transactions, and that public and private valuations would re-align over time. “I think we're seeing some of that shift now in the current environment,” she noted.

Investor preference for the CRE asset class increased quarter over quarter to the highest level since 2015. Compared to stocks, bonds and cash, CRE has steadily increased in popularity since the onset of the pandemic. “We’re in an increasing inflationary environment, and commercial real estate can serve as a moderate inflation hedge,” Rasmussen explained. With strong tenant demand for quality properties, several investors in the survey said that rents and values are rising faster than inflation. Meanwhile, stocks are falling out of favor, with investors expressing concerns that the market is overpriced and more volatile, Rasmussen noted. The Southeast and the Southwest strengthened in the third quarter and are currently the strongest U.S. regions, while those outside the Sun Belt are stagnant or declining. “In the second quarter, the largest metro economies jumped out of the gate, with 40 of the 50 top markets improving,” Muoio said. “In the (latest) quarter, we still saw a lot of improvements, with 18 markets improved, and only four worsened.” Markets that were already improving grew even stronger in the latest quarter. The Northeast lags the rest of the country, with all but one of the metros tracked by SitusAMC Insights in that region declining in the third quarter.

The multifamily sector shattered records across the board in the third quarter. Apartment returns, as measured by NCREIF’s NPI, shot up by 290 basis points QoQ to a record 6.5%, led by stellar capital appreciation. Cap rates plunged to 4.5%, the lowest level in history, and about 170 basis points (bps) below their long-term average (LTA).  Apartments saw “really breathtaking performance in nearly every market,” Muoio noted, with nearly all of the top 50 markets surpassing previous records on rent growth in the quarter.

To download the ValTrends Quarterly webinar recording and slides, click here. Access the full 28-page report, “A Tale of Two Segments,” here. Learn more about SitusAMC’s research and data offerings here.