Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
November 15, 2004 12:00 AM

Real estate remains hot despite cloudy horizon

Report says rising rates, uncertain economy not dampening enthusiasm for asset class

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The specters of rising interest rates and a sluggish economy might be curbing return expectations for 2005, but they are not curtailing investor interest in real estate, according to a new report.

    "A flood of institutional and private buyers, some using gobs of readily available cheap debt, supports values," according to the Emerging Trends in Real Estate 2005 report, released by the Urban Land Institute and PricewaterhouseCoopers LLP. "These investors wager that an inevitable economic rebound will cover their bets."

    At the same time, 67% of the survey respondents predict real estate will outperform stocks and 95% anticipate real estate will outperform bonds. They also anticipate that private real estate has the best investment potential, compared with domestic stocks and public real estate.

    More than 400 respondents including developers, institutional investors, investment advisers and real estate investment trusts participated in the survey.

    Capital trumps fundamentals, said Stephen Blank, senior fellow-finance of the Urban Land Institute, a Washington-based research and education organization, summing up the report in an interview.

    "This is truly a phenomenon," Mr. Blank said. "There's more money going into real estate than we know what to do with, but cap rates do not justify it. It's unique. It's a little bit of the perfect storm."

    The next two years or so could determine whether real estate supply and demand fundamentals improve enough to offset the potential negative impact of rising interest rates on property values and pricing, the report stated. For 2005, institutional investors who are already queued up to invest in real estate will fill any void and sustain markets during the year.

    Prospects ‘very good'

    When offered choices of variations between outstanding and modestly poor, the highest percentage of respondents, 32.5%, said real estate's prospects for profitability are "very good." Some 26.1% said profitability will be "good," and 17.5% indicated "modestly good."

    Core property portfolios are expected to return 7% to 9% over the next five to seven years, with returns in the low teens when leverage is used, the report stated. However, investors should expect 5% to 7% total returns for properties purchased recently at "rock-bottom" cap rates.

    Overall, survey respondents expect slightly higher returns in 2005 than they did in 2004. The highest returns are expected from opportunistic real estate — 15.1%, up from 14.2% predicted in last year's survey. Respondents anticipate value-added will produce returns of 12.9%, up from 12.2%; core real estate with leverage, 11.2%, up from 10.9%; unrated commercial mortgage-backed securities, 9.9%, up from 9.5%; REITs and operating companies, 8.4%, up from. 8.2%; and commercial mortgages, 6.8%, up from 6.4%.

    "I think they are modestly more encouraging because we're a year further into the cycle," Mr. Blank said about the increases. "People are more confident about the economy."

    Investors in core real estate are avoiding broker auctions in favor of off-market transactions, the report noted. Some core investors are also changing the definition of "core." One respondent said core used to mean 90% to 100% leased properties with credit tenants in prime markets, but now it can be 80% to 90% leased in secondary locations, the report stated.

    As for opportunity funds, most of their investments — 80% or more — will be outside the United States in 2005. Topping the list are leveraged office purchases in Japan and non-performing Asian debt.

    Investors are split as to whether 2005 is a good time to sell real estate and reap the benefits of what appears to be high prices, or to buy real estate, the survey indicated.

    Some investors are selling, but the problem is where to invest the money, Mr. Blank said.

    For example, Stanford University's $10 billion endowment cut its real estate allocation to 11% from the 22% investment it had two years ago, said Michael Russ, chief investment officer at Stanford Management Co., Menlo Park, Calif. — which manages the endowment — at a recent Pension Real Estate Association conference in Los Angeles.

    "We are net sellers," Mr. Russ said. "We have not seen that much to buy, and that money is going abroad."

    At the same time, the endowment is adding absolute return strategies, he said.

    "Our goal is to show more returns with a different strategy," Mr. Russ said. "We're in an ongoing arms race with other universities. The premium for private equity is shrinking, and so for us to find incremental alpha we have to move money around and go where it is not popular, like … Europe, and even more so, Asia."

    At the same conference, Mark Anson, chief investment officer for the $170.7 billion California Public Employees' Retirement System, Sacramento, said fund officials have been selling, not buying real estate.

    "People are saying that relative value is the right concept. People are saying that the risk premium has declined," Mr. Blank said.

    Real estate is really two different markets: one is the capital market and one is the asset market, and they do not have to perform together, he said.

    At what point does it make sense to buy real estate? he asked. For example, some investors may buy real estate when returns are four percentage points above the 10-year Treasury.

    "The question is how big is that change. I don't know, and it will take a while to figure out," Mr. Blank said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    ESG: Sustainability - Gaining Momentum
    Sponsored Content: ESG: Sustainability - Gaining Momentum

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit