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- January 2011: Vol. 23 No. 1

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The Right Time for Risk? Investors Should Plan Ahead for High-Yield Allocation

by Dave Esrig

Direct commercial real estate investment strategies run the gamut from the lowest risk core to the medium risk value-added and up to the highest risk opportunistic, but they all shared one characteristic through 2008 and 2009 — substantial value declines. Now though, in effect, the higher the strategy’s risk, the deeper the current discount from peak.

Institutional investors are currently pursuing core commercial properties because the cost and availability of leverage improved dramatically for stable, income-producing properties and because cash flows of core properties are more protected from the vicissitudes of the U.S. economy than those of higher risk real estate strategies. In some major markets, for example, office buildings with long-term leases to tenants with strong credit are now selling at prices substantially up from their 2009 nadir. However, pricing for riskier assets has improved little if at all.

In a simplistic sense, higher risk rea

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