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CHICAGO-Just as interest rates have fallen in recent months, so have the expected returns by commercial real estate investors, according to Real Estate Research Corp. However, they are being picky, “separating the wheat from the chaff,” according to the research company’s most recent report.

Not only has RERC noticed expected pre-tax yields declining for the previous three quarters, they now are lower than they were before Sept. 11, 2001. Investors are looking for an average 11% internal rate of return on all property types, ranging from 13.3% on hotels to 10% on multifamily rental properties. The 10% yield is the lowest since RERC began its forecasts in 1989, the company says.

The only sector where investors have seen returns that have met or exceeded their expectations in the past year has been retail assets, RERC notes. Power centers returned 16.63% in total returns while regional malls posted a 12.02% yield, according to the company’s research. Neighborhood community centers also were in double digits at 11.43%. Now, investors are looking for an 11% return on power centers and 10.6% on other retail properties, RERC says.

Investors are willing to accept going-in capitalization rates averaging 9%, according to RERC, with multifamily rental properties (7.8%) and hotels (11%) again serving as book-ends. Those figures are 10 to 30 basis points below the first-quarter numbers, the company reports.

Required internal rate of returns for office properties have fallen, to 10.7% for assets in central business districts to 11.3% for those in the suburbs.

Although the industrial sector has fared better in the economic downturn, investors are looking for a 10.4% pre-tax yield on warehouse properties and 11.5% for research and development assets.

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