CHICAGO-Hours before the Dow Jones Industrial stocks dropped by the biggest single-day loss since mid-recession 2008, the locally based National Council of Real Estate Investment Fiduciaries was already holding a discussion Thursday about a coming market correction. During the NCREIF second quarter Index Release Webinar, presenters with the council were saying that it’s likely that investors will retreat after the frothy first half of 2011, when the willingness to take risks got ahead of lackluster fundamentals.
At the market close Thursday, the Dow Jones Industrial average was at 11,383, having fallen by 512.76 points, or 4.3%. Stock gains made so far this year have been just about wiped out in the past two weeks, as economic experts say investors have embarked on a selling spree because of unease about the US debt crisis, further potential bailouts needed in Europe and an expected flat jobs report this morning by the Labor Department.
In its second quarter report, NCREIF researchers said this past year has shown positivity coming back to the economy. The council said that the rate of return for more than 6,300 tracked properties across the country had risen to 3.94%, the sixth consecutive positive quarter, joined by increased occupancy and lower cap rates. However, the researchers were more reserved about the good news during their Webinar discussion, focusing instead on the uncertain future.
“I think there may be choppy waters ahead,” said Mark Roberts, chairman of NCREIF, as well as managing director and global head of research in RREEF’s New York City office. “It’s been interesting to see values rising when fundamentals have been declining, we may see a reversal of that to some degree soon.”
One glitch that has thrown off the figures is apartments. Return from apartments has dominated the property sectors, and when lumped together skews data sets. This is true across the board, as multifamily, a darling of investors today, shows extremely low vacancy as well as low cap rates.
A poll conducted by the more than 100 attendees to the Webinar showed that most think that cap rates will stay the same or hit lower figures around 5.5% to 6%. Jeff Havsy, lead researcher for NCREIF, disagreed. “I think we might see a little rise in cap rates. I catch a breath of economic uncertainty out there,” he said during the afternoon presentation.
Of course, it’s not clear if this so-called correction will end this week. The only safe bet, according to the NCREIF data, is to stay invested in core markets. The top 10 markets saw a 0.8% better return overall in the second quarter, and have generally done much better over the long-haul than the other markets. “Though, it’s also true that some of the top 10 markets are more volatile and had lower lows during the recession periods,” Roberts said.
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