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Significant Digits: October 2021

Private Sector Real Estate Returns

Over the previous four quarters, all investment markets attempted to adjust to the second quarter 2020 news that the global economy was closed in an attempt to control the spread of the virus. Many real estate factors responded to the shock: sales volume dropped, leasing stopped, and uncertainty spiked. Starting third quarter 2020, the markets better understood the shock and started to adjust to the longer-term effects. It is from this third-quarter point until now that the total returns are presented in the following charts.

US Returns

Industrial property is the only type to avoid capital depreciation during any of the past four quarters. Industrial value growth stopped very briefly during the second quarter with a small 0.1% depreciation. During the four quarters shown in this chart, appreciation rebounded quickly and significantly. Total return for the sector over the past year was amazing at 23%. This return is from the NCREIF Property Index which contains over 4,500 industrial properties that are stabilized, unleveraged investments. It is the highest annual return for the industrial sector since NCREIF’s inception in 1978.

The Apartment sector was only slightly affected by the pandemic but starting with a very low yield leaves this segment vulnerable to any depreciation. Third-quarter 2020 was still a time of depreciation that was not recovered until first quarter 2021. Second quarter 2021 was a rebound quarter for apartments with 2.7% appreciation leading to 3.6% quarterly total return. Starting the year with low performance and ending it with high performance put the annual return for apartments at a typical 7.0%.

Nationally, the Office sector managed a positive total return because the income return exceeded the accumulated depreciation over the past four quarters. It seems that tenants have maintained or extended leases allowing office owners to continue collecting rent. Thus, Office income has not fallen as much as prices. It is uncertainty about workers’ return to the office that is holding the sector back. In aggregate across the country, retail assets have been depreciating since 2018. Prohibiting people from congregating and directly closing restaurants and bars fueled an already burning fire.

Figure 1 — Source: National Council of Real Estate Investment Fiduciaries

Figure 2 — Source: National Council of Real Estate Investment Fiduciaries

Florida Returns

Total returns by sector in Florida look very similar to the returns in the US albeit with much less acceleration in the Industrial sector. Multifamily is the only sector that produced higher total returns in Florida than it did across the US. The income return was slightly higher in Florida relative to that of the nation but the appreciation component made the big difference in the total returns. Apartments appreciated at twice the rate over the past four quarters in Florida as they did on average across the US. Following depreciation during 2Q of 2020 values fell a bit in 3Q 2020 and started appreciation during 4Q 2020, 1Q, and 2Q 2021. The quarterly change in Apartment values followed the same pattern over the state and nation but at a larger negative magnitude in the US and larger positive magnitude in Florida. This combination generated the 400 basis points gap between the state and national Apartment total returns that can be seen in the charts.

Commercial property performance was stronger on average across the nation than it was in the state of Florida during the past year. National appreciation in the industrial sector was above 3.5% for both 4Q 2020 and 1Q2021 and was 7.8% during 2Q 2021. These numbers far exceeded the Florida rate of appreciation and produced a higher annual total return. Both the Office sector and the Retail sector exhibited depreciation during each of the past four quarters in Florida as they did on average in the US. In both geographies, the Office sector was able to overcome the depreciation with income for a low but positive total return. The Retail sector depreciated at a rate too great to be offset by income. A pattern that was established pre-COVID.


The market shock occurred during 2Q 2020, just prior to our annual analysis which starts in 3Q 2020. Multifamily, Office, and Retail sectors continued to show depreciation, at least initially, into our examination period. In Florida, Multifamily performance exceeded the national average but each of the commercial sectors performed below the national average. The Industrial sector delivered extremely high unlevered core returns of 16.7% in Florida and 23.0% across the US.

Investing In Precision

Is it possible to increase the selling price of your home, or office building, or apartment complex, simply by listing it with a more detailed asking price? A past article in Marketing Science addresses this very question and concludes that “yes,” more specific asking prices in house listings produce higher selling prices.

The Study

Three authors from Cornell University, Manoj Thomas, Daniel Simon, and Vrinda Kadiyali, published a paper entitled The Price Precision Effect: Evidence from Laboratory and Market Data. The paper was published in 2010 in an academic journal called Marketing Science. To form their opinion on the impact of precision pricing, they conduct a series of experiments to determine if buyers inaccurately rank precise and imprecise values. They then look to the housing market to determine if buyers’ interpretations of precise and imprecise listing prices lead to different negotiated selling prices. Access the full paper.


Through a series of trials, the authors demonstrate that individuals tend to rank larger precise numbers below smaller less precise numbers. For example, when shown the following two numbers independently $395,000 and $395,425, people tend to judge $395,000 as the larger of the two. They go on to demonstrate that the higher the level of uncertainty around the price of an asset the greater the magnitude of this misjudgment. Furthermore, individuals with little confidence in their ability to assess values are more susceptible to influence by pricing precision. The authors define this tendency to misjudge ranking by the level of precision as the Precision Effect.

Directly related to our world of real estate, the article applies the Precision Effect concept to the sale of houses. In their experiment, participants were asked to evaluate six different possible list prices for a house. They were told that houses in the neighborhood typically sold for $400,000 to $500,000. They were then asked to rate each possible listing price as low or high on a 11-point scale. The prices shown to the participants were either rounded to the nearest $5,000 or precise to the dollar. In all cases, the precise numbers were slightly higher than the rounded numbers, for example $400,000 or $401,298. Across their sample, the average rating for the slightly higher more precise prices were lower than that of the rounded listing prices.

Following this initial result of individuals underrating more precise listing prices, the authors conduct additional experiments on buyers’ willingness to pay. In these experiments, they split the sample and precondition half of the participants by boosting their confidence or giving them experience. They find that individuals with little experience and low confidence exaggerate the Precision Effect. Will every potential buyer offer you a higher price for your house if you use a precise listing price? Probably not, but you only need one.

Florida Consumer Sentiment

Thus far during 2021, April is the peak month for consumer sentiment in the state of Florida. Following a dip from January to February, the index recovered in both March and April. In May, overall sentiment dropped back to the March level of 81. The pandemic low occurred during April 2020 when the index was 76. Since that month, the index moved between the upper 70s and lower 80s but has not approached the 100 level that it frequented during 2019.

The index has a possible range of 2 to 150 and was set to 100 in 1966. A value over 100 indicates more optimism than during 1966. In Florida, the highest recorded value was 111 during 2000 and the lowest value was 59 during 2008.

Figure 1 — Source: UF Bureau of Economic and Business Research

Figure 2 — Source: UF Bureau of Economic and Business Research

Near Term Versus Future

Even though the overall index can move in only one direction at a time, components of the index can move in different directions simultaneously. This happened during May 2021. Consumers have a virtually unchanged view of their current financial situation and believe slightly more strongly that now is a good time to purchase major items. It is clear that consumers’ view of the future, both the national economy and their personal financial situations, weakened measurably from April to May.

Index Construction

The Consumer Sentiment Index is the combined response to a five-part survey. All respondents are adult residents of Florida. Participants are asked for their current financial situation versus a year ago, expected financial situation five years in the future, expected national economic situation over next year, expected national economic situation five years from now, and is this a good time to purchase major household items.

The Index is produced by the Bureau of Economic and Business Research (BEBR) at the University of Florida. More information about the Sentiment Index, including a longer history, as well as other State of Florida economic information and population estimates, is available at BEBR’s website.

Listed REIT Returns

Listed REITs are very price responsive to general and specific information releases. Publicly traded (listed) REITs are businesses focused on the development, investment, and operation of real estate assets. Unlike private property markets, investors in REIT stocks are able to rapidly respond to information by instantly buying or selling shares in very small units at very low transactions costs. At any given moment during open exchange hours, we can observe the marginal transactions of these shares and assess the market’s view on these business prospects. In doing so, it is clear that the last 18 months produced some extremely volatile results.

Index Performance Through COVID

Monthly total returns for the FTSE NAREIT US All-Equity Index were both significantly negative and significantly positive over the past 18 months ranging from -18.7% during March 2020 to 9.2% during November 2020. Figure 1 shows the monthly total return for publicly traded equity REITs. You might be tempted to believe that these monthly figures are annualized returns, but they are not. Each column represents the actual monthly return. The pattern displayed in this chart indicates a high degree of uncertainty as monthly returns shift from positive to negative and back. Despite the uncertainty, the magnitude of returns is remarkably high. Following each of the brief negative return periods is a significantly positive monthly return. This segment seems prone to rebounding.

Figure 1 — Source: National Association of Real Estate Investment Trusts

Figure 2 — Source: National Association of Real Estate Investment Trusts

When the returns bounce from positive to negative and back over several months, it is difficult to keep track of the cumulative effect. Figure 2 is an index of these same returns originating at “1” and compounding the monthly performance. From this chart, we see that the negative March 2020 return following the negative February return led to a compound loss of approximately 25%. REITs were generating income at that time, so the value loss is slightly greater than the number shown on this chart. We also notice that the value lost in February and March 2020 was not fully recovered until March 2021. As of the end of June 2021, the index is 13.7 percent greater than the point where it started in January 2020. This translates into an 8.9% annual return over these eighteen months.

As with all returns analysis, maintaining perspective is critical. For instance, if we limit our analysis to the rise from the bottom to the top (March 2020 to June 2021), the current index is 50% above the beginning point which implies a 38.5% annualized return. Also, if we calculate an annualized return from October 2020 (another period of negative return) to June 2021, the level is even higher at 50.4% annualized. Both of these figures omit the preceding negative performance. To overcome this selectivity, we often look to standard timeframes such as a year. In this case, the one-year performance for the index is 32.8% because it comes after the February and March drop. Nevertheless, REITs produced this return to all investors who purchased at the end of June 2020.

Sector Returns

The overall index includes REITs with a wide range of specialization across the typical property types of Apartment, Industrial, Office, and Retail plus Single-Family and more niche types like timber, infrastructure, self-storage, and data centers. Most of the value is found in the major sectors and single-family for which the one-year returns are shown in Figure 3. Total returns by sector in the Listed REIT space were amazingly positive following the initial COVID downturn. As mentioned above, these returns exclude the February/March 2020 downturn but rather capture the recovery and new expansion.

If the numbers on this chart lead you to believe that we must have made a mistake, then you are reading the numbers correctly. Yes, Apartment REITs nationwide generated more than a 40% return over the past year. Office REITs, the sector that faces so much uncertainty, produced a 24% return. The recently beloved Industrial sector delivered performance between the other sectors at 30% annual total return.

The Retail sector performance really leaves us shaking our heads. From July 2020 through June 2021 the Retail REIT subsector offered more than 57% in total return. It took brave investors to buy into the Retail sector midyear 2020 and it is guaranteed that even they did not expect to earn more than 50% within a year.

Perhaps a single example will help explain this level of volatility. Simon Property Group (SPG) is the largest owner of US Shopping Malls and its performance is included in the total Retail return. Five years ago, SPG hit a peak value of $220 per share. By the beginning of 2020 (pre-COVID), that value had drifted down to $150 and during March 2020 the price fell below $50 per share. Matching the dates used for the index returns, the July 2020 to June 2021 values were $67 and $126 respectively. Thus, Simon contributed over 100% annual return to the index figure. Despite this doubling in value over the year ending June 2021, the value at that time was still lower than it was at the beginning of 2020. Thus, it is important to put any period of returns into context.

Included in Figure 3 is the total return for Single-Family REITs. These firms specialize in renting single-family homes. The chart reveals that Single-Family REITs performed very similarly to Apartment REITs with a slightly higher total return of 43%. This subsector of residential is relatively new, forming after the housing peak of 2006 and the 2009 recession. Despite the lack of market experience in valuing this business activity, renting single-family homes, investors seem to have some confidence as evidenced by the significant price increases.

Figure 3 — Source: National Association of Real Estate Investment Trusts