In economic terms, real estate—the asset class—is a little “sticky.” Trends are slow to be recognized, so it’s difficult to immediately spot any material turns, stops or starts. But just this week, detailed research data on the institutional real estate market was released, and there was nothing sticky about that data: Real estate is back.
The most authoritative source of investment performance of institutional real estate is the National Council of Real Estate Investment Fiduciaries (NCREIF). In its fourth quarter 2011 NPI (property index) report, released last week, the performance of approximately $284 billion of real estate held by this country’s largest pension funds, showed real promise. The below chart compares these one-year and 10-year returns on direct real estate investment to other benchmarks.
The leveraged NPI return of almost 27 percent is something most private real estate investors can readily identify with: The current low interest rate environment allows for very positive leverage. And in the fourth quarter of 2011, the leverage in the NPI was a relatively low 54 percent. Ratchet that loan-to-value ratio to 70-75 percent at today’s interest rates (as is typical of the non-institutional investor), and its no wonder why well-leased, income producing real estate is so popular.
Furthermore, what also makes institutional-type real estate in such demand these days is that the income return—that is, the portion of the total return that comes from actual income—is still running in the 6 percent-per-year range. Investors need income returns like this to fund on-going liabilities; where else can you find such returns, when compared to the risks?
So, although I cannot say with all certainty that we just bottomed out, these data, as sticky as they may be, clearly suggest if we aren’t there yet, we may be really close.
Chuck Dannis is co-founder of Crosson Dannis Inc., which provides real estate appraisal and consultation services for many of the nation’s largest real estate lenders and owners. Contact him at email@example.com.