Next Season’s Meager Harvest in Commercial Real Estate

Research Affiliates

Jim Masturzo, Michael Aked

Research

1 Pages

Research Affiliates examines why US commercial real estate may deliver weaker returns after a decade of unusually strong gains. The paper argues today’s elevated property prices, low cap rates, and aging building costs could leave investors facing real returns closer to 1.4%–2.6% over the decade.

Key Takeaways

Cap Rate Compression: Average commercial property cap rates fell from 7.8% in the 1990s to 5.5% between 2010 and 2015, reducing future income potential despite strong historical appreciation.
Maintenance Costs Matter: Maintaining constant building quality required roughly 2% of market value annually since 1980, creating a persistent drag between gross property value gains and realized investor returns.
Muted Return Outlook: Research Affiliates estimates 10 year annualized real returns of just 1.4%–2.6%, versus the 9.8% annualized real returns investors experienced from 2010 through 2015.
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