The overall commercial real estate (CRE) market became slightly more attractive from a return vs. risk perspective in 1Q 2019 compared to the previous quarter, but sentiment about risk-adjusted returns varied by property type.
That’s according to data gathered for the August 2019 RERC Real Estate Report, “Sifting Through the Chaos,” which was published by RERC, a SitusAMC company. The RERC institutional survey respondents’ ratings are based on a scale of 1 to 10, with 10 indicating that return far exceeds risk.
In 2Q 2019, RERC’s institutional respondents rated return vs. risk for overall CRE at 4.9, a slight uptick from 4.8 in 1Q 2019, but the same rating year over year (YoY). According to the RERC institutional respondents, risk has outweighed return every quarter since 3Q 2017, except for a blip in 3Q 2018. For comparison, the return vs. risk rating was near or above average for 7½ years prior to 2Q 2017. The current quarter’s return vs. risk rating is on the cusp of equilibrium, but remains below the post-recession average of 5.3.
- The return vs. risk rating for the office sector increased from 4.4 in 1Q 2019 to 4.7 in 2Q 2019 and is up slightly YoY from 4.6. Office was the only property type to have a quarterly increase in the rating, but the rating has generally been declining since 3Q 2016. Ratings for the office sector have generally been at or below 5.0 over the past two years, indicating that returns are not supporting the amount of risk that investors are taking.
- Though declining slightly quarter over quarter (QoQ), the industrial sector secured the best return vs. risk rating by far among the property types in 2Q 2019. The rating decreased QoQ from 5.9 to 5.8 but is up from 5.6 in 2Q 2018. The industrial sector rating has been at or above equilibrium in every post-recession quarter; the current quarter’s rating is slightly lower than the post-recession average of 5.9.
- Risk continues to overshadow returns in the retail sector. The return vs. risk rating tumbled from 4.7 to 3.8 QoQ and is the lowest among the property types. The rating also declined YoY from 4.3, reflecting the disruption in the retail industry. Risk-adjusted returns in the retail sector are now the lowest they have been since the GFC. Risk has outweighed return in the sector for two years.
- The apartment sector’s return vs. risk rating declined from 5.4 in 1Q 2019 to 5.1 in 2Q 2019. The rating also declined from 5.4 in 2Q 2018. The rating has stabilized over the past two years, but returns have generally been declining relative to risks since 2011. Returns have outweighed risks for seven consecutive quarters.
- The return vs. risk rating for the hotel sector decreased from 4.9 in 1Q 2019 to 4.8 in 2Q 2019, indicating greater risk relative to return QoQ. The rating remained the same YoY. Ratings have been at or below equilibrium for the past two years and have been generally declining since 3Q 2015.
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