5 Things You Need to Know about U.S. Real Estate Returns

November 2014

FTI Insights recently reported on various metrics related to U.S. real estate performance as at June 30, 2014. Below are a number of key points we hope you find informative:

  • Moody’s/RCA Commercial Property Price Index reports that the Industrial sector was the best performing during the past 12 months with price gains of 18%. All sectors recorded increases of at least 11%.
  • The National All-Property Composite Index has recovered 94% of its post-crisis loss. Apartment (+138%) and CBD Office (+123%) assets lead all commercial sectors in price recovery since bottoming during Q4 2009. Other sectors include Industrial (+64%), Retail (+61%), Suburban Office (+54%) and Hotel (+42%) where recovery continues, albeit at a slower pace than the national average.
  • The Financial Times of London and the London Stock Exchange (FTSE) NAREIT Index returned 16.3% during the first half of 2014. U.S. REITs outperformed the S&P 500 Index in both the first and second quarters of 2014, driven by favourable supply and demand balance, low interest rates and limited new construction thereby preventing oversupply. Apartment REITs were the top performing sector during the first half of 2014, returning 23.5%, which represents a turnaround from 2013 when returns of negative 6.2% were recorded.
  • Hotel REITs returned 17.3% during the first half of this year; 2013 returns were 27.2%. Industrial REITs returned 13.1% during the first half of 2014, after a 2013 gain of 7.4%. The Office sector returned 17.8% during the first half of 2014, nearly triple the 5.6% return recorded during 2013. Retail REITs have rebounded from 2013 performance of 1.9% return to approximately 16% in the first half of 2014. Returns were strongest within the Shopping Centre (+16.7%) and Regional Mall (+16.4%) sectors as compared to the Freestanding (+13.4%) sector.
  • FTI Insights predicts that the U.S. commercial real estate recovery will continue through 2014 as strengthening economic and labour market growth leads to falling vacancy rates. More buyers and investors are likely to continue to focus on secondary and tertiary markets to capture anticipated rental increases as the market recovery continues. Cap rate movement is expected to be minimal through the remainder of 2014, though stronger demand may lead to cap rate compression within some markets.

Wishing you a successful final quarter to wrap up 2014!