Determine holding period returns (i.e. total property returns

Center for Real Estate Strategies Conference Presentation: Insights into Commercial Real Estate Investment Returns Mark J. Eppli Professor of Finance and Bell Chair in Real Estate September 18, 2017 Researchers: Mark J. Eppli, Professor of Finance and Bell Chair in Real Estate, Marquette University Charles C. Tu, Daniel F. Mulvihill Professor of Commercial Real Estate, University of San Diego Research Purpose: Using NCREIF Data: o Determine holding period returns for commercial real estate o Explain ex-post holding period returns using ex-ante attributes

Determine holding period returns (i.e. total property returns). . . . . . . .across the five major property types, . . . . . after adjusting for risk, . . . . . across geographic area, and . . . . . across market employment size/growth . . . . using the best data in the industry . . . . The NCREIF NPI Index

Quarterly data Income and appreciation components By property type (office, industrial, retail, hotel and apartment) By regions of the U.S. and at the MSA 2016Q4 market value of half a trillion dollars and over 10,000 properties Limited to institutional property owners and mainly core assets Appraisal-based . . . . apartments outperform holding period returns and riskadjusted returns for 3, 5, 7, 10, and 15-year holding periods . . . . 7-year Holding Period Returns (1987-2016) Property Type All Apartment Industrial

Office Retail Hotel Mean 7.87% 9.05% 8.27% 6.99% 8.68% 8.63% S.D. 3.56% 2.81% 3.75%

4.76% 3.54% 4.43% Sharpe Ratio 0.62 1.21 0.70 0.28 0.85 0.67 . . . . apartment returns also best other property types across regions of the U.S. . . . .

. . . . estimating returns by city tier . . . . . . . . using employment to determine city tier . . . . . . . . across city tiers apartment returns are consistent and superior . . . . . . . . apartment returns have low volatility across time . . . . Audience question . . . . What do you think the breakdown is between income and appreciation for the seven year holding period analysis for all NPI properties: A. B. C. D.

7% income and 1% appreciation 6% income and 2% appreciation 5% income and 3% appreciation 4% income and 4% appreciation . . . . apartment and retail provide some inflation hedge with inflation averaging 2.7% during the analysis time period . . . . 7-year Holding Period Returns by Income and Capital Appreciation Returns Property Type Apartment Industrial Offi

ce Retail Hotel Income 6.98% 7.96% 7.44% 7.29% 8.95% Capital Appreciation 1.97% 0.30% -0.43%

1.33% -0.31% Total 9.05% 8.27% 6.99% 8.68% 8.63% . . . . how can industrial, office, and hotel appreciation rates be near zero or negative during a period of cap rate compression? . . . . and with generally positive NOI growth? . . . . capital expenditures is consuming property appreciation . . . .

Annual Capital Expenditures as a Percent of Market Value By Property Type 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 19 88 4 19 89 4

19 90 4 19 91 4 19 92 4 19 93 4 19 94 4 19 95 4 19 96 4 19 97 4 19 98 4 19 99 4 20 00 4 20 01 4 20 02 4 20 03 4 20 04 4 20 05 4

20 06 4 20 07 4 20 08 4 20 09 4 20 10 4 20 11 4 20 12 4 20 13 4 20 14 4 20 15 4 20 16 4 Source: NCREIF data used in New NCREIF Value

Index and Operations Measures, Michael S. Young, Jeffrey D. Fisher, and Joseph DAlessandro, Journal of Real Estate Literature, 25:1 (2017), 221-235. Apartments

Hotel Industrial Offi ce Retail . . . . holding period returns including and excluding Cap. Ex. . . . . 7-year Holding Period Returns with and without Capital Expenditures Property Type All Apartment

Industrial Office Retail Hotel Returns Excluding Cap Ex Capital Expenditures Holding Period Returns Including Cap Ex 9.86%

10.22% 9.89% 9.71% 10.02% 11.71% 1.99% 1.18% 1.62% 2.72% 1.34% 3.10% 7.87% 9.05% 8.27%

6.99% 8.68% 8.63% Key Takeaways Apartment returns dominate the other property types when measuring

Unadjusted returns Risk-adjusted return Across geographic region Across city tiers Apartment and retail properties are an anecdotal hedge for inflation Apartments and retail have the lowest ratio of Annual Cap Ex to Property Value of the property types Click to edit Master text styles CLICK TO EDIT MASTER TITLE STYLE