The NCREIF ODCE Index NOI growth is currently at its lowest
point in the past decade (as shown in the graph on the top-right).
Also known
as the NFI-ODCE, the index consists of 30 open-end commingled funds, pursuing a
diversified core investment strategy and primarily investing in private equity
real estate, with $173.1 billion of gross real estate assets and $133.3 billion
of net real estate assets.
An important criterion for a fund to be considered
for the NFI-ODCE index is that at least 80% of market value of real estate net
assets must be invested in office, industrial apartment and retail property
types. The decrease in net operating income growth is important to note, given
that U.S. commercial real estate prices have been rising steadily since 2009
and are only now beginning to plateau; decreasing in some sectors and
locations.
Though one cannot be sure whether this bull market is finally coming
to an end, one must consider that it is a possibility.
According to deal
tracker Real Capital Analytics, Inc., $25.1 billion worth of commercial
property was exchanged in February compared to $47.3 billion in February 2015;
a decrease of approximately 88%.
Commercial real estate valuations have been on the rise
since 2009, with retail and apartment properties above 2007 levels. Though not
quite as high, industrial and office properties have also surpassed values
reported in 2009.
One of the reasons for the appreciation is the increase in
demand for commercial real estate, resulting in some of the lowest vacancy
rates in the last 25 years. The apartments sector has the highest vacancy rate,
relative to vacancy rates in the respective time period, when compared to the
office, retail and industrial real estate sectors. If this data concerns you,
you are not alone.
Last week, Kansas City Fed President Esther George expressed
her concern for the commercial real estate market by saying it is a potential
asset bubble that “bears watching”. George encouraged the U.S. central bank
to stay on the course and gradually raise interest rates. This has been a
growing concern for many, with the U.S. central bank acting increasingly dovish
in recent times.
Something else to consider is the beginning of the end of
SIFI designations. The SIFI designation for non-bank companies and a similar
designation for eight of the big banks were established to create safeguards to
prevent or minimize the effects of another financial crisis by requiring
financial institutions recognized as being too big to fail maintain high levels
of capital reserves and liquidity, and be subject to extensive government
oversight. However, both MetLife and GE have recently filed to have the SIFI
designation removed. If successful, this may mean an increase in capital
available. Though the effects may not be immediate, commercial real estate
lending might increase for those firms with exposure to the industry.
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