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The U.S. commercial real estate market has delivered impressive total returns over the past five years. So impressive, in fact, that some investors are beginning to wonder how much longer the momentum can run. This cycle, like all others, will eventually come to an end. Yet real estate has historically performed well in moderate-growth, low interest rate environments, conditions that we expect to persist for several more years.
The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI), a measure of unlevered private commercial real estate, returned 13% year-over-year in the second quarter of 2015, handly outperforming the return on large-cap stocks (7.4%) and bonds (1.7%)3. Capital values have advanced on strong cash-flow growth as well as yield compression, while income returns have continued to provide healthy spreads relative to those on other asset classes.
Fundamentals are expected to remain healthy in the context of moderate economic growth and historically low levels of construction. Rising cash flows and loosening capital markets should continue to fuel investor appetite. However, rising interest rates are a potential headwind: Although they are unlikely to rise sharply, an increase from today’s low levels might weigh on future capital gains. Accordingly, NPI total returns are expected to average 7.3% annually over the next five years: lower than in the past, but still attractive, we believe, on a risk-adjusted basis relative to other investment options in a rising interest-rate environment.
Source : Deutsche Asset & Wealth Management
