Real Estate Returns
Dr. Peter Linneman, once again--
"...if real estate pricing is on average correct, relative to alternative returns, it probably means that 50% of real estate is over-priced, and 50% is under-priced. The question is: 'Into which half does your portfolio fall?'"
Alternative returns are roughly equal to BBB bonds, or 6.25 to 7.0%. Real estate returns have two components--annual appreciation of ~2.5%, and 3.75 to 4.5% in current cash flow. This implies a cap rate of 6% plus or minus 150bps. This means you either put no leverage on a deal [current NNN assets] or high leverage if you feel confident you have an attractive pop in value at exit [hedgies working with OPM].
