2016 was a strong year for U.S. commercial real estate (CRE). For the most part, demand continued to outstrip supply, pushing vacancy rates lower and rents higher. Prices generally ended the year above where they started, delivering total returns to core real estate in line with historical norms. In more subtle ways, however, the landscape began to shift. While fundamentals were strong, financial-market volatility curbed the decline of cap rates that had powered capital gains since 2010. Total returns slipped into the single digits for the first time since the financial crisis.
We expect that commercial real estate will deliver a similar return profile over the next five years. Given that supply is generally moderate and shows tentative signs of peaking, we believe that real estate is positioned to generate healthy NOI (Net Operating Income) growth. At the same time, rising interest rates and temperate capital flows are expected to put modest upward pressure on cap rates, slowing the pace of appreciation. Total returns are expected to be primarily income driven, averaging 5%-6% annually through 2021 (6%-7% over the next two years).
Source : Deutsche Asset & Wealth Management