Time to Buy? Time to Sell? Time to Hold?

According to the most recent Real Estate Research Corporation institutional investor and investment manager survey, the investment market seems to be saying that it lacks conviction, with 50 percent of participants for holding, 20 percent for “folding” (or selling), and only 30 percent for investing. As the following chart indicates, with the exception of hotels (67 percent buy) and multifamily (43 percent buy), the market appears to lack both conviction and direction.

Since it is known that transaction velocity is increasing, the question is: how are people bridging this great divide? The rationales heard range from real estate’s “relative value” as compared to alternative investments, to property acquisition prices versus reproduction costs, to the increasing availability of both conventional as well as securitized leverage, to the effect that increasing amounts of competition is having on prices, to the economy and real estate fundamentals’ “rapid” improvement, to increased competition from sovereign wealth funds and offshore buyers . . . the list goes on and on.

But surprisingly, what one doesn’t hear many—if any—people talking about is risk-adjusted rates of return. If investors are looking for core-type rates of return said to be in the 7.0 percent to 8.0 percent internal rate of return (IRR) range with 5.0 percent +/- initial yields, this equates to an IRR in the range of 350 to 450 basis points over ten-year U.S. Treasury bonds and an initial yield 150+/- over U.S. Treasury bonds. Is the risk of owning and operating commercial real estate being adequately compensated for? This is a debate everyone would like to hear.

Readers are invited to share their views by e-mailing stephen.blank@uli.org; select edited responses will be published. In addition, feel free to post comments below.