Private real estate rose during 3Q22, showing slight gains in a quarter marked by declines in equities and fixed income. U.S. and global ex-U.S. REITs fell and underperformed equity indices, due to the cloudy economic outlook as well as a sizeable upward move in U.S. government bond yields. Real assets as a group posted negative returns in 3Q, with commodity prices declining over slowing global growth.
Commercial Real Estate Gains
- The NCREIF Property Index, an unlevered measure of U.S. institutional real estate assets, rose 0.6% during 3Q. The income return was 0.9%; the appreciation return was -0.4%.
- Hotels, which represent a small portion of the index, led property sector performance with a gain of 2.7%. Office finished last with a loss of 0.7%.
- Regionally, the South led with a 1.1% gain, while the Midwest was the worst performer but still rose 0.2%.
- The NCREIF Open-End Diversified Core Equity Index, representing equity ownership positions in U.S. core real estate with leverage, rose 0.3% during 3Q, with an income return of 0.6% and an appreciation return of -0.3%.
- While all property sectors traded lower during the quarter, the sectors that were most resilient included self-storage and hotels amid strong fundamentals and pricing power. Malls also outperformed after being a meaningful laggard year to date.
- The poorest-performing sectors included data centers, due to fears around power costs and higher cost of capital; office, due to sluggish return-to-office momentum; and health care, due to labor cost pressures in senior housing.
REITs Lag Equities
- The FTSE Nareit Equity REITs Index, representing U.S. REITs, dropped 9.9%, underperforming the S&P 500 (-4.9%) but exhibiting strong performance relative to European REITs.
- The FTSE EPRA Nareit Developed Europe Index (USD) fell 21.7% during the quarter, led by the United Kingdom (-25.9%), which lagged on the new government’s approach to a debt-financed fiscal expansion that resulted in a sharp decline in the pound and government bonds.
- Continental Europe (-19.2%) performed better on a relative basis, but was still weighed down by currency headwinds, accelerating inflation, rate hike expectations, soaring energy prices, and continued conflict between Russia and Ukraine.
- The FTSE EPRA Nareit Developed Asia Index (USD) fell 9.4% during the quarter.
- Australian REITs (-11.5%) were the weakest performers in the region, driven by concerns over slowing demand in office and cap rate expansion in industrial stocks.
Widespread Losses for Real Assets
- The S&P GSCI Index fell 10.3%. WTI Crude closed the quarter at $79/barrel, down more than 20% from 2Q.
- Gold (S&P Gold Spot Price Index: -7.5%), listed infrastructure (DJB Global Infrastructure: -11.1%), and TIPS (Bloomberg TIPS: -5.1%) also declined.
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