Q1 2024
The first edition of SRR Real Estate Quarterly aligns with the release of the Expanded NCREIF Property Index (NPI). Therefore, this edition will examine the new property types and subtypes available and present SRR Consulting’s framework for tracking performance in key property segments and major property types.
Expanded NPI
From its inception date (Q1 1978) until Q4 2023, the NPI included five property types – apartment, hotel, industrial, office, and retail. The Expanded NPI, released on April 25, 2024, includes all property types and subtypes, reorganized existing property types, and created new property types for senior housing and self-storage.
It has been a significant undertaking for staff, membership, and, especially, NCREIF’s Research Committee. Trust me. I was NCREIF’s Director of Research from 2015 to 2018 and we were working on this project way back then.
The changing dynamics of demand for commercial real estate from tenants and investors made this change inevitable, but defining these new types and subtypes, then adjusting the data submission to align with new definitions required a considerable amount of industry participation.
These changes do add a new measure of complexity, which is nothing new for my research peers and I, but it does mean care should be taken to determine how best to use the new property categories. Small cuts of the data can cause distortions for growth rates and create time series that are too short to be meaningful. Plus, some property segments are underrepresented in the NCREIF database such that masking criteria blocks data availability.
At SRR Consulting, digging into the new property definitions serves two goals:
1. To determine which new property types and subtypes have the depth required for tracking financial and operational performance in future SRR Real Estate Quarterly reports, and
2. To select the key property segments available in the data that best align with how investors approach their private real estate strategy.
Key Property Segments
SRR Consulting has dug into the new cuts available in the Expanded NPI and identified the following 15 key property segments for tracking commercial real estate performance going forward. These segments vary considerably by size. The smaller segments are included because they reflect rapidly growing areas of investor interest.
Key Property Segments | Building Features | Q1 2024 Market Value ($B) | % of Expanded NPI MV |
Data Center | High/redundant power supply; significant cooling capacity; Fiber optic connectivity; Raised floors or drop ceilings; May be leased by megawatts or square footage | $4.8 | 0.5% |
Hotel | Full or limited (no food/beverage) service hotels | $3.5 | 0.4% |
Life Science | Office or industrial facilities designed with infrastructure to support a life science lab and has life science tenancy | $24.5 | 2.7% |
Logistics | Warehouses for local/regional use (18ft+ clear heights; <15% office) and national/bulk use (30ft+ clear; <10% office); Cold storage; Truck terminals; Air cargo storage/distribution | $277.5 | 31.0% |
Mall | Enclosed or open-air retail center with shops offering a wide-variety goods, services, and entertainment connected by common walkways; 400,000+ square feet | $56.2 | 6.3% |
Medical Office | Office building 90% leased to medical tenants that use the property to deliver out-patient medical services | $19.5 | 2.2% |
Multifamily | Traditional for-rent, multi-tenant, residential properties | $229.5 | 25.6% |
Primary Office | Office buildings in central business districts (CBDs) and other urban districts with total commercial/residential density of 6-to-11 million square feet per mile | $124.1 | 13.8% |
Secondary Office | Office buildings in suburban areas and secondary business districts with office density >500,000 square feet per mile | $27.8 | 3.1% |
Self-Storage | Multi-unit storage facilities; Unit size typically 10x30 or less and leased monthly | $22.7 | 2.5% |
Senior Housing | Residential and/or care facilities where most units are designated for senior living; Includes independent living, assisted living, continuing care communities, and skilled nursing | $11.2 | 1.2% |
Single-Family Rental (SFR) | Professionally managed single-family communities or aggregated units using a centralized leasing and operating platform | $4.2 | 0.5% |
Street Retail | Storefront retail in or adjacent to office or multifamily buildings on a street with heavy pedestrian and vehicle traffic; No or limited setbacks from the street | $7.7 | 0.9% |
Strip Retail | Anchored or unanchored, open-air shopping center of in-line stores with common parking area; May also include pad sites; <400,000 square feet | $54.4 | 6.1% |
Student Housing | For-rent, multi-tenant, residential properties positioned for students by location, lease structure, and amenities | $11.5 | 1.3% |
Total MV of Key Property Segments | $879.0 | 98.0% | |
As of Q1 2024, these 15 property types include 12,357 properties totaling $879 billion in market value, or 98% of the Expanded NPI. This set of key property segments aligns the data available with categories of most interest to investors and has enough depth to develop a national view of performance trends by segment.
The chart below shows trailing quarterly returns across these 15 key segments with the Expanded NPI total, ranked by Q1 2024 results. The Expanded NPI total return was -0.9% for the quarter, which is the best performance over the past five quarters as values reset to higher interest rates.
Nine key property segments outperformed the overall index, while only four – data center, strip retail, hotel, and mall – reported positive total returns in the first quarter. The multifamily and single-family rental segments were close to the overall total return, at -1.0% each. Primary office, life science, secondary office, and street retail had the lowest returns for the quarter.
Major Property Types
Key segments with market values accounting for 5% or less of the Expanded NPI will be difficult to refine further for geographic comparisons. Also, the time series for smaller key segments is not sufficient for comparing across economic cycles. To balance this with the need for more detailed analysis, SRR Consulting will use four of these key segments as major property types.
Logistics, multifamily, primary office, and strip retail will be the four major property types used in SRR Real Estate Quarterly reports. These four types combined account for 9,006 properties in Q1 2024, totaling $685 billion in market value, or 76% of Expanded NPI market value. These property types will be the focus of SRR Consulting’s detailed performance and operating analyses, including metro-level returns, rent growth, and expenses.
Major Property Types | Q1 2024 Property Count | Q1 2024 Market Value ($B) | % of Expanded NPI MV |
Logistics | 5,173 | $277.5 | 31.0% |
Multifamily | 2,238 | $229.5 | 25.6% |
Primary Office | 713 | $124.1 | 13.8% |
Strip Retail | 882 | $54.4 | 6.1% |
Total | 9,006 | $685.5 | 76.4% |
Examining longer time periods with these major property types, the strong pandemic-era performance of Logistics has led to annualized outperformance over all other major property types for the past 20 years. At 10.9% annualized performance over the 20-years ending Q 2024, Logistics is the only major property type to outperform the overall NPI.
Rolling annual total returns by major property type help illustrate performance differences across cycles.
Clearly, logistics has been the leader in total return performance for several years. The logistics performance boom during the pandemic is owed to the sharp acceleration of online shopping during lockdowns. The shift toward storing goods in fulfillment centers versus holding excess inventory in retail stores is evident when logistics and strip retail performance started to diverge in the mid-2010s. The pandemic simply sped up adoption of ecommerce by everyone all at once.
To break out income return effects, we can split out the capital return, which shows value appreciation when positive or depreciation when negative. I have indexed the capital return to the Expanded NPI trough from the Great Financial Crisis (GFC) in Q1 2010 in the graph below.
The logistics story pops out immediately. But check out the sad story about primary office. Primary office values are nearly in-line with their GFC trough. Occupancy for primary office never recovered to its pre-GFC peak of 91% and faces new demand challenges from technology. Technology is rapidly changing office tasks and enabling a new work-from-anywhere business culture.
By focusing on primary office as a major property type, SRR Consulting is nudging coverage toward dense locations. The challenges to office demand don’t imply the end of using office space. Instead, these challenges will reframe how and when office space is used as well as who uses the space.
High quality office buildings that meet the needs of climate-conscious companies and their employees will likely fare better. Office buildings designed with ample meeting space and amenities for bringing teams together and connecting with clients will likely fare better. Offices that are easy to access through public transit and close to residences and retail will likely fare better. Density assists with these factors and, in real estate, the property sitting on land with a higher value tends to outperform.
Metro Returns
The top 10 metro areas by market value (MV) in the Expanded NPI account for 58% of its $897 billion total MV. A higher concentration of market value equates to a heavier influence on value-weighted returns. New York is the largest metro by value for all property types, at $85.6 billion in market value, or 9.5% of the Expanded NPI.
Atlanta and Dallas had relatively flat all property total returns for Q1 2024 with roughly 1% depreciation offset by income returns. On the other end of the spectrum, San Francisco and Boston faced steeper value declines, which aligns with a heavier concentration of office properties in these markets.
Taking another step down in granularity, the next four charts will show a similar market-level breakdown of returns for the largest metros by MV within each major property type.
Riverside is the largest logistics market in the Expanded NPI, at $40.5 billion in MV, or 14.6% of total logistics MV, followed by Los Angeles at 9.4% of logistics market value. Combined with Orange County (8th largest) and San Diego (18th largest), Southern California accounts for 29% of logistics NPI market value. In Q1 2024, Southern California markets were a drag on total logistics returns due to continued depreciation.
Atlanta and Miami logistics properties recorded positive capital returns in Q1 2024, while Chicago had no change in its logistics capital value. As a result, these three metros led large market logistics performance for the quarter. Dallas and New York had sub-1% total logistics returns with slight depreciation, while Oakland and Seattle performance mirrored overall logistics performance.
Multifamily market value is less concentrated by market with the top 10 markets accounting for 53% of $229 billion multifamily NPI MV. To keep this analysis balanced, the top 12 markets (59% of multifamily MV) are shown below.
New York is the largest multifamily market, at 7.5% of multifamily NPI MV, followed by Washington DC (6.9%), Dallas (6.4%), and Los Angeles (5.7%). Modest depreciation continues across multifamily markets.
In Washington DC, the multifamily income return was completely offset depreciation for flat performance. Chicago and Houston had slightly higher quarterly multifamily income returns than DC, but not by enough to overcome depreciation in either market.
Primary office is the most concentrated major property type by market with 21% of the $124 billion in primary office NPI MV in New York. The top 10 markets account for 85% of the primary office index. Washington DC, San Francisco, Los Angeles, and Boston each account for 10% or more of index value.
The top three large primary office metros by total return are no surprise to long-time followers of NPI returns. Washington DC is the least volatile of office markets over the long-term due to relatively stable demand from the federal government. Office returns in Houston (energy) and San Jose (tech) are the least correlated to other office markets given their strong single-industry concentrations. In periods when office demand is generally weak, it is common for these markets to float to the top, even if “the top” still generates negative total returns.
Strip retail is the least concentrated by market among major property types and thus, the chart below is expanded to the top 15 markets. These markets account for 53% of the $54 billion strip retail NPI MV. Washington DC and Los Angeles are the largest strip retail markets with each accounting for 6% of the overall strip retail market value.
Retail experienced a capital value correction with the expansion of ecommerce, lessening (but not eliminating) the impact of value declines due to higher interest rates. The result is that strip retail overall had a positive total return in Q1 2024 with five of the largest strip retail markets experiencing appreciation over the quarter.
So What?
This edition of SRR Real Estate Quarterly established the framework for examining performance across major property types, key property segments, and markets going forward.
Depreciation is still working its way through appraisal-based valuations, which will likely run its course over the next year. Generating income growth in excess of expenses may become challenging in locations and property types with oncoming supply. However, the so-called ‘alternative’ property types may offer attractive returns and now, we have the private market data to track them.
SRR Consulting will use this framework to continue tracking private equity real estate performance and develop views on the best market opportunities. Subscribe to receive the SRR Real Estate Quarterly every May, August, November, and February.
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