- November 1, 2015: Vol. 27, Number 10

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Not cheap: Is it time to move down the risk curve?

by David Morton and John Papadoulias

“In two to three years, we will be able to take back the vacancy and significantly increase rents.” “Supply is in check nationally, and fundamentals will be strong for years to come.” “The sector is trading at a wide premium to replacement cost, so it makes more sense to develop.” “This time, it’s different.”

If you are an LP with an allocation to U.S. opportunistic real estate funds, some of these statements may sound familiar to you. Value-add and opportunistic real estate fund managers explain in a wide variety of ways how they intend to generate an 18 percent to 20 percent target return. The problem is, not all target returns are created equally. It is far more important to focus on target risk levels throughout real estate cycles than target returns.

Closed-end real estate funds can be slow-moving, somewhat cumbersome vehicles. The typical three-year investment period, followed by three to five years to institute a busi

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