Make room for real estate

Global weekly commentary
20/mrt/2017 / By BlackRock

Key points

  1. We believe the U.S. commercial real estate recovery still has room to run amid reflation and resilient rental yields.
  2. The Fed raised rates. Stocks rose, bonds rallied and the U.S. dollar fell on Chair Janet Yellen’s perceived dovish remarks.
  3. U.S. durable goods orders could provide another sign of the disconnect between sentiment surveys and hard economic data.

1. Make room for real estates

The U.S. commercial real estate recovery is in its eighth year, but we believe it still has room to run amid reflation, competitive rental yields and potential for operating income growth.

Chart of the week
Components of commercial real estate return during U.S. rate hiking cycles

Chart of the week

Sources: BlackRock Investment Institute and NCREIF, March 2017.
Notes: Total return is represented by the total return of the NCREIF Property Index (NPI), which tracks commercial real estate properties held for investment purposes. The income yield is based on the cash flows generated by the properties in the NPI. Other components are net operating income (NOI) growth (year-over-year growth in NOI) and changes in the capitalisation rate (which is NOI divided by the property's value).

Resilient rental income has helped support U.S. real estate returns during past rate-hiking cycles, especially during more gradual ones like today’s. See the green bars in the chart above. And commercial properties are typically able to raise rents in reflationary periods, albeit often with a lag, providing some inflation protection.

Reasons for real estate

U.S. commercial property prices have returned to 2008 peak levels, yet we see key differences with the debt-driven previous cycle that ended in a bust. Real estate development activity is lower and credit access is tighter. Valuations, measured by the ratio of operating income to property values versus 10-year U.S. Treasuries, are around the 20-year average.

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.

We favour industrial and office properties that should benefit from reflation. We are neutral on apartments due to elevated supply and avoid retail properties due to e-commerce competition. We like selected publicly traded U.S. real estate investment trusts and commercial mortgage-backed securities.



  • The Fed raised interest rates as expected. The U.S. dollar index fell to a one-month low on the perceived dovish tone of Chair Yellen’s remarks. U.S. Treasury yields fell and global shares rallied.
  • Dutch Prime Minister Mark Rutte looks set to form the next Dutch government after his centre-right party beat Geert Wilders’ far-right populist party. European stocks rose and the euro strengthened.
  • Oil prices stabilised after sharp declines, supporting energy-related stocks and high yield bonds.



  Date: Event
March 22 Japan trade balance
March 23 Eurozone and Germany consumer confidence; Fed Chair Yellen speaks
March 24 Global PMIs; U.S. durable goods orders

U.S. durable goods orders could provide another sign of the disconnect between economic sentiment surveys and economic activity data. Recent surveys have pointed to accelerating U.S. growth, but a pickup hasn’t yet shown up in actual economic activity reports, possibly due to the typical lag between hard and soft data.

Richard Turnill
Managing Director, is Global Chief Investment Strategist for BlackRock
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active Equities business ...

This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Sources: Bloomberg unless otherwise specified.

Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

The opinions expressed in this paper may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2016 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.