CRE Consultant Predicts Lower CRE Returns until the Mid-10s

The San Francisco-based real estate advisory Wolfback is predicting a slump in U.S. commercial real estate investment returns for 2011–for the next four years, in fact–including multifamily returns. Not losses, but simply much lower returns than were experienced in 2010.

According to John Flavin, principal at the company, institutional-grade U.S. commercial real estate provided investors a whopping 25 percent return in 2010. But investors should be prepared to see those numbers drop to only 5 percent beginning this year.

Flavin says that in 2009 he determined that two economic variables–CRE debt level and the rate of unemployment–are highly correlated to commercial real estate returns. The model he devised projected healthy returns for 2010, but much more modest ones for the following four years.

At least one recent measure of CRE returns agreed with Flavin’s 2010 projection. The MIT Transactions-Based Index reports that institutional real estate assets did, in fact, deliver annual returns of 25 percent in 2010, very close to Wolfback’s projection. (It should be noted, however, that other indexes did not agree so closely; the NCREIF Property Index’s approach, for instance, put 2010 returns at 13.1 percent.)

CRE investors typically look at vacancy levels, supply and demand in making decisions, notes Flavin, but he asserts that such data can be unreliable in a turbulent economic environment. Focusing instead on debt level and unemployment, he says that the coming years will not match 2010 for returns.

“Last year’s healthy returns reflect strong institutional investor demand for trophy office and apartment properties,” Flavin explains in a statement. “The more modest return levels projected for 2011 to 2014 are attributable to limited credit availability, uncertain demand and constrained new development activity.”