‘Foong on Finance’: Firm Predicts 5% Return for Commercial Real Estate this Year

A new projection indicates that CRE returns will fall over the next four years.

John Flavin, principal of the real estate consulting and advisory firm Wolfback says that returns for institutional-grade commercial real estate will drop from 25 percent in 2010 to 5 percent beginning this year.

Flavin says his projection of strong returns in 2010 was validated by the Massachusetts Institute of Technology Transactions-Based Index (TBI), which showed that institutional real estate assets did deliver annual returns of 25 percent last year.

Wolfback’s analysis also considers CRE debt level and rate of unemployment in calculating investment returns, as the company states those are highly correlated to CRE returns.

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