Income Likely to Dominate Future Core Real Estate Returns

The NFI-ODCE Index* is a commonly used benchmark in the real estate asset management industry for core real estate funds.  The NFI-ODCE Index is made up of 23 large, diversified open-end core funds. The index’s returns have been very strong in recent years, as shown in the table below. The annualized five-year return of 10.52%, net of fees, was largely driven by price appreciation in the commercial real estate markets. 

Price appreciation has slowed over the past year, and NFI-ODCE Index net returns have slowed as well. The net-of-fees 2017 annual return of 6.68% is now below the 40-year average of 7.66%. With significant increased supply in the multi-family and office markets coming online and little demand for new retail space, we expect to see slow rental growth in the coming years.  Combined with an expected rise in interest rates likely preventing further cap rate compression, we believe this slowing of returns will largely be driven by continued lower appreciation returns of 1.0%–2.0% annually and income returns in the 4.0%–5.0% range.  In total, we anticipate NFI-ODCE Index returns to average 5.0%–7.0% annually (net of fees) over the next three years. 

In our view, as long as this performance trend persists, high-quality income generation—and not capital appreciation—will be the primary determinant of real estate returns over the next few years.

   
  
   
  
    
  
   Normal 
   0 
   
   
   
   
   false 
   false 
   false 
   
   EN-US 
   X-NONE 
   X-NONE 
   
    
    
    
    
    
    
    
    
    
   
   
    
    
    
    
    
    
    
    
    
    
    
    
    
  
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
  
   
 
 /* Style Definitions */
 table.MsoNormalTable
	{mso-style-name:"Table Normal";
	mso-tstyle-rowband-size:0;
	mso-tstyle-colband-size:0;
	mso-style-noshow:yes;
	mso-style-priority:99;
	mso-style-parent:"";
	mso-padding-alt:0in 5.4pt 0in 5.4pt;
	mso-para-margin-top:0in;
	mso-para-margin-right:0in;
	mso-para-margin-bottom:10.0pt;
	mso-para-margin-left:0in;
	line-height:115%;
	mso-pagination:widow-orphan;
	font-size:11.0pt;
	font-family:"Calibri",sans-serif;
	mso-ascii-font-family:Calibri;
	mso-ascii-theme-font:minor-latin;
	mso-hansi-font-family:Calibri;
	mso-hansi-theme-font:minor-latin;
	mso-bidi-font-family:"Times New Roman";
	mso-bidi-theme-font:minor-bidi;}
 
   *The NFI-ODCE Index is the NCREIF Open-End Diversified Core Index.

*The NFI-ODCE Index is the NCREIF Open-End Diversified Core Index.

 

Casey Wendeln

Senior Vice President

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.