Real Estate Highlights

Philip Coté, Senior Research Analyst with Pavilion Advisory Group Ltd., moderated a real estate panel at the 2015 Opal Financial Endowment and Foundation Forum in Boston in mid-November. Here are some highlights from the discussion.

Fundamentals and cap rates

The NCREIF national cap rate (U.S.) is 5.4% as of June 2015, which is low compared to its historical average. Despite low cap rates, commercial real estate remains attractive on a relative basis. The spread between cap rates and Treasury yields is wider than average, including prior real estate peaks—notably from 2006-2007. Real estate fundamentals are intact with no major risk of oversupply from new construction, and vacancy rates are generally low. Net operating income (NOI) has increased in most sectors, helped by an improving employment picture in the United States.

Trends

The growth in e-commerce has been benefiting the industrial property sector, which is seeing increased demand for warehouses and distribution centers. Many traditional retail centers, however, have experienced a loss of tenants that have had their businesses disrupted by e-commerce.

Net operating income (NOI) has increased in most sectors, helped by an improving employment picture in the United States.

Secondary markets have been performing well as buyers seek higher returns than those available in core gateway markets. Value-add and opportunistic strategies have been gaining in popularity among institutional investors, including funds focused on redevelopment, repositioning and lease-up strategies.


GENERAL DISCLOSURE: This paper is intended for sophisticated and/or accredited investors and is for illustrative use only. While the assumptions, data and models used to develop the information contained herein are from sources deemed to be reliable, there can be no certainty or guarantee regarding the likelihood of the outcomes as presented. This document is not and should not be construed as legal, taxation or investment advice. Any investment advice would be delivered pursuant to a written agreement and legal and taxation advice should be obtained from appropriate and qualified professionals. No part of this publication may be reproduced in any manner without our prior written permission. © 2016 Pavilion Advisory Group Inc.