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March 24, 2017 Printable Version Printable Version

What Will Drive Real Estate Returns in the Coming Years?
By Jeremy Zirin, CAIA, Senior Research Analyst


Core real estate investments have flourished since the financial crisis. The NCREIF Property Index (NPI), since returning six consecutive double-digit annual returns through 2015, delivered an 8% total return in 2016. Despite lower projected absolute returns compared to what we have experienced over the last six years, real estate remains an attractive investment relative to other asset classes.

This week’s chart illustrates the historical 1-year trailing total returns of the NCREIF Property Index (NPI) going back to 1979 broken down by the three main components of total return: dividend yield, cap rate shift (also known as cap rate compression / expansion), and net operating income (NOI) growth. As seen in the chart, the slowdown in total returns since last peaking in the third quarter of 2015 has been dominated by the cap rate shift effect as cap rates level-off at their current historically low levels. NOI growth, on the other hand, has been relatively stable since the slowdown and will be a critical component of future real estate returns going forward as overall fundamentals for the asset class remain strong. Despite lower projected absolute returns, real estate is still an attractive investment relative to other asset classes and should deliver positive returns to investors again in 2017.

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