Most investors in “core” properties (i.e., high-quality, well-located, multi-tenanted, income-producing office, industrial, multifamily and retail properties) expect to receive around 8 percent to 9 percent on their unleveraged real estate investments. If they use leverage, they tend to leverage assets between 5 percent and 60 percent, with average portfolio leverage ranging between 20 percent and 40 percent. Leveraged return expectations for core real estate investments, therefore, range between 10 percent and 15 percent.
Investors typically expect value-added investments (i.e., investments in underperforming and/or undermanaged assets that possess upside potential) to generate returns of between 12 percent and 15 percent. Investors seek properties where NOI and property value can be positively affected through a change in marketing, operating or leasing strategy; physical improvements; and/or a new capital structure.
Opportunistic investments can be described as investments in underperforming and/or undermanaged assets that hold the expectation of near-term increases in cash flow and value through “turnaround” strategies. Opportunistic investments often include development-oriented or repositioning/redevelopment strategies. These investments typically imply the assumption of more risk in exchange for a higher return. Investors expect returns in excess of 18 percent to 20 percent.
Many of the larger investors have both core and high-yield investment components within their portfolios and, therefore, have different risk/return expectations depending upon the strategy for each portion of the portfolio.
