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 (see page 4 for a full definition), offers compelling risk-adjusted returns now?

In this paper we argue 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.