March 20, 2017

U.S. commercial real estate has recovered, but the asset class could offer more growth amid reflation. This week on BlackRock‘s (BLK) global weekly commentary, Richard Turnill, global chief investment strategist, makes the case.

Property prices have returned to 2008 highs, but there are differences between then and now, says Turnill. For one, real estate development activity is lower and access to credit tighter. Valuations based on ratios of operating income to property values relative to the 10-year U.S. Treasuries are in the vicinity of the 20-year average.

In past rising rate cycles, strong rental income supported U.S. real estate returns, especially during gradual rate-hike environments. Turnill says: 

We see U.S. commercial real estate delivering attractive total returns over the next few years in a low-return world. We expect capital appreciation to slow but see operating income growth due to the reflationary backdrop and the potential for property managers to add value by upgrading buildings. Average yields of 3.5% are competitive with 3.4% for U.S. investment grade and an S&P 500 dividend yield of 2%. Demand is strong: Nearly half of institutions in our most recent Global Institutional Rebalancing Survey intended to raise allocations to real estate this year.

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Source: Barron's