NFI-ODCE Index Q1 2025 Update: Are Signs of Stabilization Taking Hold?

NFI-ODCE Index First Quarter Update: Uncertainty or Opportunity?

Accordant Investments Chief Investment Officer & Portfolio Manager, Garrett Zdolshek, joined IREI’s CEO, Geoffrey Dohrmann, for another quarterly webinar covering the latest performance of the NFI-ODCE Index and examining the structural shifts at play in today’s real estate landscape.

¹The index posted a net total return of 0.85% in Q1 2025, with a trailing 1-year return of 1.2%. Following an extended period of decline, these modest gains mark a shift in momentum, suggesting that institutional core real estate may be entering an early phase of stabilization. It’s also important from an appreciation standpoint, as it it’s slightly positive overall across all sectors as mentioned by Garrett.

Source: Slide 10 of the NFI-ODCE Index Q1 2025 Update presentation [1]

Market Valuations and Cap Rates

The ODCE index-wide going-in cap rate is 4.6%², with residential at 4.7% and industrial at 3.9%. While industrial may appear low on the surface, Garrett emphasized it’s actually risen nearly 3bps from its low. This increase is driven by lease mark-to-market dynamics—meaning that even with a slightly softer market, new or renewed leases are still commanding significantly higher rents than those signed five years ago, often in the range of 30%. Although apartment NOI growth has moderated, industrial income remains robust due to this embedded upside. Garrett cautioned against evaluating cap rates in isolation, noting that headline figures don’t capture the underlying fundamentals driving investor decisions.

Source: Slide 22 of the NFI-ODCE Index Q1 2025 Update presentation [2]

These valuation adjustments follow a 25% peak-to-trough decline in ODCE value³. Performance suggests that after bottoming in Q2 of 2024 has since recovered only about 1.8% according to Garrett, placing us “somewhere in the middle” of the recovery cycle. This mirrors the slow, sustained climb seen after the 1990s downturn, as Garrett noted. Unlike the sharp and elevated returns that followed the GFC, today’s environment appears to favor a steadier, more measured path forward.

Sector Highlights

Retail outperformed in Q1 2025 with a 2.0% return⁴—the highest among core sectors. Garrett noted this marks a significant shift for retail, which has not led performance in some time. Earlier value declines are now being offset by stronger income yields, making the sector more attractive.

Industrial (1.4%) and Residential (1.3%) followed, continuing their recovery trend. Office posted a 0.8% return—technically positive, but still the weakest among major sectors over the broader period. Garrett also pointed out that the ODCE Index itself (shown in black on the tile chart) is returning to the middle of the performance range, signaling a more balanced distribution between outperforming and underperforming sectors.

 Source: Slide 17 of the NFI-ODCE Index Q1 2025 Update presentation [4] 

What it takes to deliver

Data centers led 1-year performance among alternative property subtypes, driven in part by active development and sustained demand. Manufactured housing also delivered strong results. As Garrett noted, purpose-built single-family rental communities are becoming more prevalent within the ODCE Index—highlighting a sector with strong growth potential and rising institutional interest.⁵ Additionally, NACREIF’s revised classification system now treats Self-Storage as a standalone sector rather than grouping it under "Other," highlighting its growing role in diversified portfolios.⁶

Operating fundamentals and financing conditions

• Portfolio occupancy remained steady at 91%; leverage is currently at 27% LTV.⁷ As mentioned by Garret, this is the second quarter that the leverage had ticked down and this is a positive sign for the market.
• Year-over-year NOI growth has fallen below the rate of inflation for the first time in a while—a reversal from prior quarters where income growth outpaced price increases.⁸
• Debt maturities remain limited over the next few years, and Garrett noted that even if all loans were refinanced at current market rates, ODCE funds would only see a modest 50-basis-point increase in cost—highlighting a manageable refinancing outlook.⁹
  
  

Market Liquidity and Capital Shifts

Q1 2025 continued to show more disposition than acquisition activity, largely tied to ongoing redemption needs. Office comprised nearly a third of dispositions by dollar volume, followed by residential (30%) and industrial (27%). Garrett noted this reflects a continued normalization of valuations, allowing more assets to transact at or near NAV.¹⁰

Source: Slide 30 of the NFI-ODCE Index Q1 2025 Update presentation [10]

While Office wasn’t the largest in disposition volume, it stood out as a signal of improving market function. Garrett pointed out in his commentary that Office sales indicate valuations are aligning with buyer expectations, allowing more deals to close. This marks a shift from prior quarters, where uncertainty kept Office largely on the sidelines.

Summary Outlook

Looking ahead, inflation is easing and employment pressures are beginning to subside, supporting expectations for a potential rate cut later in the year.¹¹ Development has slowed across most sectors, with exceptions in data centers and select multifamily segments.⁵ ODCE portfolios remain concentrated in Western U.S. markets, which continue to drive allocation trends.⁷

Capital activity reflects a more balanced environment, with redemptions and new investments occurring in parallel. Notably, institutional interest is growing in infrastructure as part of broader portfolio repositioning.¹²

In conclusion, these dynamics suggest that institutional core real estate—as tracked by the NFI-ODCE Index—is beginning to show signs of stabilization following a multi-year downturn.

Sources:

[3] Slide 11 - Historical Drawdown & Recovery Periods

[5] Slide 18 - Alternative Subtypes

[6] Slide 5 - NCREIF’s New Property Type & Subtypes

[7] Slide 4 - ODCE YoY– 1Q 2025 Summary

[8] Slide 24 - Inflation & NOI Growth

[9] Slide 27 - ODCE Debt Maturity

[11] Slide 20 - Fed Policy & Employment Trends

[12] Slide 30 – Transaction Summary

IMPORTANT DISCLOSURES

Accordant Investments LLC (“Accordant”) is an SEC registered investment adviser. For more information about our services and disclosures, please visit our website at www.accordantinvestments.com. This content does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service managed by Accordant.

NCREIF Fund Index – Open End Diversified Core Equity (the “NFI-ODCE Index”). Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. 

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