The increase in total returns for private real estate was modest, but we think it is notable for several reasons.
KEY TAKEAWAYS
- Total returns for the NCREIF ODCE Index, an important private real estate benchmark for institutional investors, were positive for the first time in two years.
- Listed REITs have outperformed the NCREIF ODCE index by 52 percentage points during that period, indicative of the lead-lag relationship between listed and private.
- The Q3 increase was modest, but we think it’s notable because analysis shows that once returns have turned positive, they tended to stay positive.
Positive private CRE returns for the first time in two years, the lead-lag relationship with listed REITs, and a preliminary outlook for 2025.
This month we are digging into the performance of private real estate.
1. Positive private CRE returns
First, total returns for the NCREIF ODCE Index were positive for the first time in two years, with gross total returns at 0.25% and net of fees at 0.3% (Exhibit 1). Income returns of more than 1% more than offset price declines of approximately .8%.
EXHIBIT 1
Private returns were positive for first time in two years
At September 30, 2024. Source: NCREIF, Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results.
As a review, the ODCE index tracks 25 open-ended funds that own core commercial real estate. NCREIF began calculating the ODCE index in 2006 with data back to 1977.
Many institutional investors are benchmarked to the index, making it an important market barometer.
2. The lead-lag relationship with listed REITs
The second point we’re watching: the lead-lag relationship between listed and private real estate.
Total returns for the NCREIF ODCE index net of fees have now declined nearly 20% from their peak in 3Q22, with capital returns down almost 25%. Over the same period, absolute listed REIT returns are up almost 33%.
Net-net, listed REITs have outperformed the NCREIF ODCE index by 52 percentage points over the past eight quarters.
This is a significant disparity in performance, but it’s also typical of the lead-lag relationship between listed and private. Listed REITs lead in downturns, but also in recoveries.
Indeed, it’s important to remember that listed REIT total returns were down 25 percentage points in 2022 while NCREIF ODCE index total returns were up seven percentage points (Exhibit 2).
Fortunes reversed in 2023 when listed REITs were up more than ten percentage points while the NCREIF ODCE index was down more than ten percentage points. That trend has continued in 2024. Listed REITs have posted year-to-date total returns of 14% through the third quarter whereas private was down -3%.
EXHIBIT 2
Listed real estate returns have led private
At September 30, 2024. Source: Bloomberg, Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results. 1) Listed U.S. REITs represented by the FTSE Nareit All Equity REITs Index. 2) Private Real Estate represented by NCREIF Fund Index—Open-End Diversified Core Equity Index (NFI-ODCE)
3. Outlook for 2025
Finally, this begs the question where does the NCREIF ODCE index go next?
The increase in 3Q24 total returns was modest, but we think it is notable. This is because our analysis of prior index downturns shows that when net total returns turned positive, they remained positive. (Exhibit 3).
EXHIBIT 3
When private returns turned positive, they remained positive
At September 30, 2024. Source: Bloomberg, Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results.
Bottom line, we believe it’s likely that the NCREIF ODCE index has bottomed, as positive income returns are now offsetting capital returns that are still negative. However, we do not expect a V-shaped recovery similar to what occurred post the GFC. We think the recovery will be inconsistent across property types.
This leads us to project low to mid-single digit total returns for private real estate, net of fees, in the year ahead.
To put this preliminary forecast in historical perspective, the NCREIF ODCE index has generated 5.7% total returns CAGR net of fees since 4Q89, 5.2% over the past 10-years and 2% over the past 5-years.
We see a backdrop most like 1993 as the CRE cycle emerged from the S&L crisis. The NCREIF ODCE index generated one-year total returns of 0.7% in 1Q93, 2.9% in 2Q93, 4.1% in 3Q93 and 5.0% in 4Q93.
There are two potential risks to our view that the ODCE index has bottomed.
First, it’s possible that appraisers sharpen their pencils in 4Q24 and mark down property prices, pushing total returns into negative territory one final time.
We think this is less likely given the auto-regressive nature of the index as mentioned previously. Said differently, objects in motion tend to stay in motion.
Second, while not our house view, a spike in interest rates driven by re-acceleration of inflation could pose headwinds. That said, the listed REIT market is sending a signal that private CRE may be resilient in the face of higher interest rates.
Indeed, the sector is down only around two percentage points from its 2024 peak despite 10-year treasury rates rising nearly 70 basis points since mid-September. This underscores that CRE is more than just a play on interest rates.
Watch October 2024 The Real Estate Reel: A closer look at Q3’s historically strong listed REIT returns
Watch all The Real Estate Reel videos.
FURTHER READING
Capital Market Assumptions
Expected returns for the next 10 years amid elevated inflation and resilient global growth
The drivers of listed real estate’s strong start to the year
The absolute performance of listed REITs, their relative performance to the broader market and the drivers of the positive returns.
Exploring the lead-lag relationship of listed and private real estate
Private real estate returns in fourth quarter 2024, the lead-lad relationship with listed REITs and the shifting performance of private market property types. This month, we are digging into the performance of the NCREIF ODCE index. Many institutional investors are benchmarked to this private CRE index, which makes it an important market barometer.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.
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