Real estate’s recent performance has elevated its stature and garnered more attention from investors. It has become more broadly accepted as an established asset class, producing new investors as well as increases in allocations for existing investors. Nothing builds confidence and comfort with an asset class like a prolonged bull market.
In fact, U.S. real estate investors have enjoyed a spectacular post–global financial crisis bull market run.
The U.S. commercial real estate market bottomed in 2009. The NCREIF Property Index rolling 12-month return turned positive in third quarter 2010. Since then, the NPI has registered six consecutive years of double-digit annual returns, including a 13.3 percent return in 2015. The annualized average total return for the past five years was 11.93 percent. During the past 10 years, the NPI has outperformed the S&P 500 Index on an annualized basis by 500 basis points, 7.8 percent compared with 7.3 percent.
And for investors who have taken advantage of historically low interest rates, the returns have been even more mind-blowing. NPI leveraged returns for the past six years (2010–2015) have been 30.1 percent, 31.6 percent, 16.6 percent, 15.9 percent, 18.7 percent and 21.3 percent. During the past 10 years, NPI leveraged properties have produced a total return of 10.5 percent annually.
Real estate has enjoyed a nice run, but how long can it last?
“We have seen a deceleration in both income and appreciation returns over recent quarters,” notes Sara Rutledge, director of research at NCREIF. “Even though cap rates continue to find new lows, the pace of compression is slight. The property markets are still showing positive fundamentals with strong occupancy and NOI growth, indicating that, if we are approaching a peak, the path ahead will likely be a flattening out rather than a steep decline.”
While it’s only natural for investors to grow somewhat cautious after a six-year bull market, the outlook for the asset class remains positive. Returns may no longer be fueled by yield compression, but rental growth — driven by economic and employment growth, and higher occupancies — should continue to generate healthy performance in the near term.
The views, statements and opinions expressed in this article are those of the author and are not necessarily those of Institutional Real Estate, Inc.
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Larry Gray is editorial director of Institutional Real Estate, Inc.
