EXECUTIVE SUMMARY
U.S. real estate values have bottomed out after two years of declines. Transactions volumes are already perking up, with buyers searching for early-cycle bargains. But does that mean U.S. core real estate, defined here as a portfolio of stabilized properties diversified by sector and geography, offers compelling risk-adjusted returns now?
In this paper, PGIM Real Estate argues the answer to this question is yes, for three reasons:
1. A Favorable Entry Point for U.S. Core
The period close to valuations bottoms has historically been the optimal time to realize the highest real estate returns. We see enough parallels with prior historic periods to expect the same this cycle.
2. A Coming Period of High Income Returns and Income Growth
Income returns have already reset well above the norms for the last decade, making real estate yields compelling on both an absolute and relative basis. More importantly, income growth will be much stronger at the beginning of this cycle than the historic norms.
3. Access to an Evolving Opportunity Set
Core portfolios are evolving to maximize risk-adjusted returns. The diversification advantages of a core portfolio will be enhanced by greater exposure to sectors supported by structural demand, as well as diversification across metros with different economic drivers.
For Financial Professional Use Only. Not for use with the public.
The views expressed herein are those of PGIM Real Estate investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any security.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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