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The U.S. economy and financial markets have absorbed a series of mini-shocks over the past year, including a Chinese slowdown, slumping commodity prices, a soaring dollar, a retrenching energy industry, a Federal Reserve interest rate hike, and the United Kingdom’s “Brexit” vote to leave the European Union. U.S. commercial real estate has not been immune to these developments, but it has proved remarkably resilient. NCREIF Property Index (NPI) total returns of 10.6% (trailing four quarters) in the second quarter 2016 were down from 2015 (13.3%) but compared favorably with returns on stocks (4.0%) and bonds (6.7%).
In our view, the outlook for commercial real estate is bright. Despite global headwinds, the U.S. economy is fundamentally sound, supported by a resurgent consumer and housing market, and lacking in acute imbalances (e.g., inflation or asset bubbles) that have precipitated past recessions. While supply is increasing, it is generally doing so at a measured and sustainable pace, allowing absorption to propel occupancies and rents. Cap rates are historically low, but they are elevated relative to interest rates. Accordingly, we expect that unlevered total returns to core real estate will average 6%-8% in 2016 and annually through 2020, down from the double-digit levels of recent years, but on a par with historical levels on an inflation-adjusted basis.
Source : Deutsche Asset & Wealth Management
