In retrospect, it's fascinating how sophisticatedinvestors bought into the whole risk/return spectrum rationale forcommercial real estate. Back in the 1980s, investors invested inreal estate funds for income and some appreciation. If you wantedto take the risk for bigger returns, you did development deals.Then consultants got more involved and institutional investorsbegan depending more on research based strategies. The pensionfunds had their asset allocation models. It started to getcomplicated.
Real estate investment managers began adapting to the marketdemand and realized they could sell more funds and potentiallyraise more money with different strategies. They distinguishedbetween core, value add and opportunistic strategies. Core focusedon well-leased income producing properties. Value add investmentswere touted as property enhancement or releasing plays. Opportunitystarted out as development and morphed into global investing, andin the end involved putting down little equity and a lot ofmortgage debt on core properties.The value add portfolio managersstarted depending more on leverage to boost returns too and thencore managers followed suit.
Of course, the capital and credit wave superchargedperformance--even core funds produced opportunistic-like returnsfor a few years. Now the credit crash wipes out many opportunityfunds, while erasing the heady gains and then some of core funds.Before it's all over the core-based NCREIF Index couldlose 35-40% of its value from peak to trough. I guessthat's what some pension consultant might call a riskadjusted return. Well at least the core investors have somethingleft.
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