- April 1, 2014: Vol. 26, Number 4

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Core reality: The perception that there is no upside left for core investors runs afoul of statistical reality

by Melissa Reagen

Today’s industry news headlines are often dominated by trophy real estate assets trading for record high prices and all-time low capitalization rates. These headlines have led some investors to conclude that the market has returned to 2007 euphoria and that limited investment opportunities exist across the entire core real estate universe.

This perception of a narrow investment opportunity set should be separated from the reality that certain trophy assets still offer investment opportunity. It should also be separated from the reality that some core real estate properties are trading below (in some cases well below) record levels. Failure to understand these realities can cause missed opportunities.

Record high prices and all-time low capitalization rates create an anxiety that prices are moving away from fundamentals just as they did in 2006–2007. In a simplified discounted cash flow model, a current 6 percent to 7 percent expected return assumes a 4 percent to 5

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