Private CRE Returns More Sustainable

Private real estate returns are at a more sustainable level today than they were in early 2011, according to Jeffrey Fisher, senior global consultant with Real Capital Analytics & Argus Software and co-president of the Homer Hoyt Institute.

"I think what we're seeing is a continuation of the trends we saw in the fourth quarter of 2011 with returns moderating," Fisher said during a video interview with REIT.com last month at REITWise 2012: NAREIT's Law, Accounting and Finance Conference in Hollywood, Fla.

Private real estate returns in 2011 were around 12 percent. Fisher said returns earlier in the year were at the 16 percent level on an unlevered basis, but he never considered them sustainable.

"In the whole history of the NCREIF Property Index, the average return over the last 30 years or so is more in the 10 percent range. That's where I'd expect, on an unlevered basis, to see returns for private real estate," he said.

Fisher noted that in 2008 and 2009, the commercial real estate market had punished companies that were carrying too much leverage.

When it comes to improving fundamentals in the commercial real estate market, Fisher said the main impediment has been the economy. Although the employment picture has brightened in the last six months, Fisher said continuous improvement in the job market is necessary to strengthen commercial real estate fundamentals.

"Jobs aren't the only factor, but, especially for the office space, you need jobs to have companies that need to hire people that need to have space in the office building. That carries over into retail and other property types," Fisher said.

Another challenge is the number of refinancings that still need to take place, according to Fisher. A number of property owners can't refinance and have to sell their assets, he said.

"That's been happening more and more lately, but we need to have continued availability of equity capital to replace some of the debt capital in order to have continued improvement in the commercial real estate market," Fisher said.