Real Rates of Return: Does Real Estate Make Sense?

By Ryan, James P. | Real Estate Issues, Fall/Winter 1992 | Go to article overview

Real Rates of Return: Does Real Estate Make Sense?


Ryan, James P., Real Estate Issues


During the early to mid-1980s real estate values increased dramatically due to the influx of capital from individual investors, syndicators, pension fund managers and foreign investors. The plethora of transactions during this period provided sufficient data for market analysts and appraisers to abstract capitalization and yield rates. As markets changed over the last several years, the number of transactions has decreased markedly. The oversupply of space, particularly in office buildings, coupled with the overall decline in the economy caused many investors to withdraw from the equity market.

Declines in value also have reduced the underlying security of many loans, restricting banks and other institutional lenders from making new mortgages. In fact over the last two years the value of office buildings in some pension fund portfolios has declined 50% or more. Negative appreciation, as shown in the FRC/NCREIF index since the fourth quarter of 1989, and concern about the economy also have kept buyers on the sidelines.

As values have eroded and returns declined, many investors have withdrawn totally from the real estate market. Low returns and business reasons, such as retiree benefits payouts, have prompted some plan sponsors to redeem their shares in funds, placing additional burdens on liquidity. Although investment managers recognize that it is not prudent to sell in a down market, some must sell to meet withdrawal requests from clients. Investor uncertainty and tight credit policies by lenders have created a void of meaningful data in the market to demonstrate market pricing. The limited data that is available is subject to various influences and pressures and requires significant adjustments by analysts. This article focuses on alternative sources of comparable yield data to support the valuation of real estate.

RETURNS

A structural shift has taken place in the real estate industry. The days of independent entrepreneurs or developers buying or building a project, and their institutional partners supplying most (if not all) of the capital, with little or no control, are gone. Today, pension funds, real estate investment trusts (REITs), foreign investors and other institutional players seek real estate investments with defined objectives and meaningful participation in mind. They are conscious of the risk/reward relationship and expect more direct involvement in the decision-making process. Many institutions have increased their real estate portfolios (in some cases by default of partnerships, foreclosure or other involuntary processes) and can draw upon property level experience to enhance future returns and make informed decisions. The expanded exposure to real estate, particularly within financial institutions and/ or publicly traded companies, has heightened the relevance of performance to an organization.

Today's more powerful computer technology and networked databases also have made data more readily available. Investors no longer simply compare one real estate deal against another or look at the most recent sales in a market to make an acquisition decision; they consider alternative (non-real estate) investments and weigh the risks of a property against them. Far more scrutiny is applied to tenant underwriting and the timing of lease expirations than in the past. Property analysts must examine the industries of major tenants and judge their potential.

The dramatic changes in the world over the last two years and their impact on the U.S. economy have forced investors to delve deeper into the strength of tenant income streams. A few years ago tenants like Wang Computers, Eastern Airlines, Security Pacific, Drexel Burnham, Integrated Resources, etc., were considered to be desirable lessees. Within a relatively short period of time these and other similar companies filed bankruptcy or merged with other companies, potentially reducing their worth to a property. Now the heavy focus on the quality of cash flows requires discounts for weak tenants and more tenant/business analysis during the underwriting process. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Real Rates of Return: Does Real Estate Make Sense?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.