I have the honor of being an Adjunct Professor at the NYU Schack Institute of Real Estate where I teach the occasional course. An outstanding textbook we utilize was written by Dr. Peter Linneman, a distinguished professor at the Wharton School of Business, and one of his lessons is summarized in the nearby chart.
Linneman models four investments in the following asset vehicles: Core, Core Plus, REIT and Value-add. Each of the four investments has equal capital outlays, NOI growth rates and exit cap rates. Linneman forecasts the returns for each investment by modeling Base, Strong, Weak and Disaster real estate market scenarios.
A key conclusion, Linneman writes, is that “in all cases, the Value-add fund yields the highest IRR, while the Core strategy (NCREIF) yields the lowest in all but the Disaster scenario.”
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