Last week I asked an industry veteran who works for a company that manages a major core real estate fund about the fund's returns. He answered not surprisingly that the past year has been pretty brutal--the fund lost almost 40% for its investors, a fairly typical result in the competitive set. But he also mentioned that over its nearly 40-year history, the portfolio has recorded about an 8% annualized return just about what advisors promised when they started marketing core funds all those decades ago.
Lost in the past 20 years of rollercoaster performance and overleveraging, commercial real estate is supposed to give investors a bond plus return--somewhere between lower risk bonds and higher risk stocks. An 8% annualized return delivers rather nicely on that promise.
But core fund marketers also proffered that real estate was less volatile than other assets--providing relatively reliable steady, eddy returns. The pitch was well-leased properties would yield strong income and provide opportunity for additional modest appreciation.
The low volatility part of the story hasn't exactly panned out--stocks certainly seesaw more wildly, but real estate hardly provides anything approaching stable, reliable year-to-year returns. If investors mistime their plays, they court big losses--pity anyone who bought into a core strategy post 2005.
But whether you are a long-term player or short-term market timer, core has to look good right now. The big open-end funds approach market bottom--value losses finally flatten out with further downside risk limited. You can start collecting a decent income coupon even if values don't ratchet up for a while and eventually take advantage of appreciation mark-ups in any recovery.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
