Income producing real estate is particularly desirable today in the investment landscape since there are two potential sources of gain: periodic cash flow and increasing property values. Historically, commercial real estate has performed well in inflationary periods.
While demographics create basic needs for commercial property, the primary driver in increased rents and values arises from jobs and their respective incomes.
How well is commercial real estate performing? Very well is the answer – at an average 8.58 percent per year total return since 2000, including a 25 percent loss in 2009. In the 12-months ending December 2013, it was an impressive 10.56 percent.
The data for this analysis comes from the National Council of Real Estate Investment Fiduciaries (NCREIF), which is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. NCREIF reports accurate, unbiased return metrics, with a framework in place that assures consistency over time and across investors. To read more about NCREIF click http://www.ncreif.org/index.aspx
NCREIF’s return assumptions include:
- Properties are acquired through all-cash transaction (no loans)
- Since the returns are within tax-free investments, no taxes are paid (except property taxes). There are no long-term gains taxed at the time of sale, and the investors do not depreciate the property.
- Returns are calculated quarterly and include both the net-cash flow from the property and the change in the property value. Specifically, total return is the net operating income from the property, less property management fees, plus the change in value.
For details and related questions click http://www.ncreif.org/faqsproperty.aspx
Within the NCREIF space, more than 7,000 commercial properties are tracked with a combined market value of $353.9 billion. This data series is recognized as a top proxy for U.S. commercial real estate returns and performance.
The annualized trailing 12-months return are included in the following table and graph.
To see NCREIF’s data series (for all covered property types), click http://www.ncreif.org/property-index-returns.aspx
Coming up in tomorrow’s blog will be an analysis of the returns on apartments using NCREIF data.
It still remains time to overweight in real estate.
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