NFI-ODCE Index: Continuously evolving

One of the common misperceptions that we observe in the media and among many financial advisors is the belief that commercial real estate is merely downtown office buildings. This is simply not true across the commercial real estate market, with office making up just 20% of the U.S. market, and certainly not true as it relates to the NFI-ODCE (NCREIF Fund Index - Open End Diversified Core Equity)*. The NFI-ODCE is constantly evolving and the 25 private funds that currently make up the index are actively re-allocating to property types that have more attractive growth potential.

Over the past decade, the NFI-ODCE index has seen significant shifts in property weights, reflecting broader trends in the real estate market and the overall economy. As of December 31, 2023, the key property type allocations in the NFI-ODCE index were industrial at 33.1%, multi-family at 29.1%, office at 18.1%, retail at 10.5%, and “other” at 9%.

The shifts in property weights can be largely attributed to the changing dynamics that are commonly discussed in the financial media, but interestingly, many of those trends began much earlier than when they appeared in the headlines. For example, as the chart below depicts, the NFI-ODCE has seen a large decline in office, but the decrease in office exposure began in 2016, long before we ever knew what COVID-19 was, let alone the impact it would have on the world. Retail properties have also been decreasing, as demand has been weakening since the GFC in 2009 due to changing consumer behaviors.

Conversely, many of the NFI-ODCE funds began increasing allocations to the industrial, multi-family, and “other” property types. Industrial has benefited from an online retailing trend that started to take hold well before the pandemic—a trend that exponentially accelerated during the pandemic as many people were forced to buy goods online. Multi-family properties were also being added to many of the funds as many managers correctly identified that homes were not being supplied fast enough to meet demand within the U.S. Finally, the “other” property types were added to many funds to diversify away from the traditional property sectors into higher growth potential property types such as self-storage.

These changes in property weights reflect broader trends in commercial real estate, where the NFI-ODCE managers are rebalancing portfolios towards sectors that have the potential to thrive and take advantage of secular growth trends. These strategic adjustments aim to enhance portfolio performance while managing potential risks in a rapidly evolving market​​.

The evolution of the NFI-ODCE index reflects a forward-thinking approach to real estate investment, one that embraces change as an opportunity for growth and prosperity. Through strategic reallocations and diversification efforts, the index has adapted to shifting market dynamics, positioning itself for success in a rapidly evolving landscape. Looking ahead, investors can remain confident in the index's ability to navigate emerging trends and capitalize on new opportunities, paving the way for continued success and growth in the realm of commercial real estate investment.

Definitions

*NCREIF Fund Index — Open-end Diversified Core Equity (NFI-ODCE) consists of private real estate equity funds that meet certain criteria with respect to such things as leverage (less than 35%), operations (at least 75% invested in properties that are 75% or more leased), sector and geographic diversification, and investment in core real estate (at least 75% in office, industrial, apartment and retail properties). One cannot invest directly in an index.