March 30, 2020
With the COVID-19 pandemic giving rise to financial forecasts that include curtailed economic expectations and greater odds of a negative tail event, there’s “much greater than normal uncertainty” around real estate pricing, say Green Street Advisors’ Cedrik Lachance and Michael Knott. Nonetheless, commercial real estate ought to deliver unlevered total returns in the high-5% range for buy-and-hold investors.
“Compared to the corporate bond market, where yields have risen materially in recent weeks, this suggests that property prices could decline by double-digits in the coming year,” they write. “The bond market, however, has offered plenty of false signals over time.” Lachance and Knott say comparing expected returns on investment-grade corporate bonds is “far more telling than what can be gleaned from shrinking treasury yields.”
For institutional investors willing and able to put capital to work in the current environment, “market volatility is an opportunity, not a threat,” write Lachance and Knott.
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