Headquartered at Chicago's Aon Center, NCREIF says cap rate compression continued across the board during Q3.

CHICAGO—Investment performance across 7,371 institutionally-owned commercial properties continued to soften in the third quarter, the National Council of Real Estate Investment Fiduciaries said Wednesday. Returns for the three months that ended Sept. 30 represented the weakest Q3 results since 2010, according to NCREIF.

The quarterly total return as measured in the NCREIF Property Index was 1.77% for Q3, including a 1.16% income return and 0.60% total appreciation. That's down from 2.03% last quarter and 3.09% a year ago.

NCREIF notes that while trending down over the past six years, the quarterly income return has been fairly consistent during 2016. It was 1.19% in Q2, for example. Appreciation, conversely, has been on a steeper downward trajectory thus far this year, with Q3's capital return representing less than one-third the rate that was recorded in the year-ago period. Conversely, appreciation in 2015 reached its highest level since 2007.

The annual NPI total return for the year that ended Sept. 30 was 9.22%, consisting of a 4.81% income return and 4.26% appreciation. For longer-term context, the annualized average total return for the past five years was 11.18%, and 7.22% over the past decade.

NCREIF notes that the NPI is an unlevered index and, given the longevity of low interest rates, higher returns could be achieved by investors utilizing leverage. Nearly half of the $516.4 billion worth of properties in the NPI utilize leverage. Total leveraged returns for these 3,454 properties were 2.35% in Q3 and 12.95% for the preceding 12 months, comparing more favorably to other asset classes.

The best performing among property types over the preceding quarter and year continued to be industrial, with a 2.89% return for Q3 and 12.5% for the trailing 12 months. Industrial was the only sector to post a quarterly return above 2%, although retail came close with a 1.98% return for the quarter. maintained its lead for quarterly and trailing year total returns, followed closely by retail.

Although apartment outpaced office for total returns, the two sectors' income returns were nearly identical for Q3. What separated apartment and office returns overall was the appreciation segment: 0.60% for apartments, compared to just 0.15% for office. The hotel sector withstood the third consecutive quarter of depreciation to remain the weakest property type, eking out a 1.35% quarterly total return and trailing-year total return of 7.17%.

Property fundamentals within the NPI universe were stable during Q3, NCREIF says. Overall occupancy held at its 15-year high of 93.2%, with trailing-year NOI growth of 5.4%, including hotels.

While occupancy was steady overall, there was considerable variance by property type. Occupancy rose for industrial and office from the previous quarter and over the preceding year, but down for apartment and retail. With an increase of 110 basis points over the year, to 95.9%, industrial occupancy remains the highest of all property types, while office, at 88.4%, has the lowest occupancy rate.

Despite a 110-bps decline in occupancy over the year, apartment remains the leader for trailing-year NOI growth, at 7.8%. At 4.0%, office had the slowest trailing-year NOI growth.

With 215 properties traded during Q3, transaction volume for NPI assets totaled $9.6 billion in the quarter, for a 24% increase in volume over the year-ago period. Year-to-date transaction volume, at $37.5 billion, was up 28% from the same period last year. The implied valuation cap rate edged down to 4.48% in Q3, a new historical low. Cap rate compression occurred across all property types during the quarter, led by apartment and office.