Briefing Memo | September 2016
The Case for U.S. Core Real Estate: Why Invest Now?
Executive Summary
Tim Wang, Ph.D.
Head of Investment Research

Fundamentals and capital markets point to an extended real estate
cycle. Even though the industry is in the seventh year of its cycle, relative
valuation metrics and favorable supply/demand fundamentals suggest that
core real estate is well-positioned for an extended run. The “slow-but-steady”
labor market and economic expansion likely will continue to keep upward
pressure on rents and occupancies as supply growth generally lags demand.

A core real estate strategy seeks to invest in high-quality commercial
buildings using low leverage. Well-leased apartment, industrial, office, and
retail properties comprise the majority of a core real estate portfolio. Effective
property management drives net operating income growth during economic
expansions and stabilizes asset cash flows in market downturns.

Historical returns are compelling, and core real estate pricing
continues to offer relative value. Over the past 20 years, total returns for
real estate have significantly outperformed most stocks and bonds. The
sector’s risk-adjusted returns are also better than and/or comparable to many
equities and fixed-income indices. Real core real estate pricing (adjusted for
inflation) has just recovered to its pre-recession peak as of the first half of
2016. On a relative basis, it still trails public equity market valuation and real
GDP.

Growth in current income can hedge against inflation and mitigate the
impacts of a rising interest rate environment. With the nation
approaching full employment, the prospect of Federal Reserve rate hikes is
mounting. At the same time, equity markets are highly volatile and bond
market yields are at unprecedented lows. U.S. core real estate has
demonstrated that even modest macro growth trends can translate into robust
gains in property-level net operating income.

Adding core real estate to a mixed-asset portfolio can offer
diversification benefits. The inclusion of core real estate within a mixedasset portfolio can enhance returns through asset diversification. Historical
returns have very low or negative correlations with most stock and bond
indices. Additionally, large core funds offer intra-class diversification through
exposure to different property types, regions and metro areas, and industries.

Maintaining a core real estate allocation for at least six years can
mitigate vintage year risk. A hypothetical six-year hold period of the open
end core real estate fund index would have generated positive returns at any
point over the past 30 years. While cyclical peaks are difficult to forecast, the
consistency of income returns makes core real estate an attractive investment
vehicle for disciplined investors facing an uncertain global outlook. With this
understanding, institutional investors have increased capital allocations to
core real estate steadily over the past two decades.
Director
+1 212.883.2754
[email protected]
Dags Chen, CFA
Vice President
+1 212.883.2725
[email protected]
The Case for U.S. Core Real Estate: Why Invest Now? | September 2016
Introduction
The core real estate investment strategy focuses on the acquisition of well-leased, high quality properties in established
markets. Investments are primarily focused in four property sectors: apartment, industrial, office, and retail, and may be
supplemented with hotel and other niche property types. Core properties demonstrate stable and predictable income flows
because of their generally dominant locations, credit tenancy, and quality construction.
A high portion of anticipated total return for this strategy comes from current income and cash flow. At certain points in
the cycle, appreciation return may comprise a substantial component of total return, but the main appeal of core real estate
is predictable income returns derived from stable operating performance. For the National Council of Real Estate Investment
Fiduciaries Open End Diversified Core Equity Fund Index (NCREIF ODCE), portfolio-level leverage among constituent funds
is 20-30%.1 Active property and portfolio management also help buttress cash returns as landlords continually adjust
property leasing and capital improvement strategies based upon “street level” intelligence.
Total return targets for core real estate investments are generally 7–10% over an entire market cycle.2 While core real
estate pricing is above its 2007 peak3, this is not a cause for alarm considering that the economy, labor market, and
population – factors that ultimately drive real estate demand - are also past their pre-recession peaks. Real estate
fundamentals and capital markets indicators remain favorable, and as a result, core real estate remains relatively well
positioned for the remainder of the cycle even if an economic downturn happens sooner than anticipated.
In this briefing memo, Clarion Partners Investment Research highlights the principal reasons currently supporting
investment in core real estate including:
1)
2)
3)
4)
5)
6)
Attractive absolute and risk-adjusted historical total returns.
High current income with the potential to hedge inflation and rising interest rates.
Beneficial diversification within a mixed-asset portfolio.
Increased market depth and liquidity due to the ongoing influx of institutional capital.
Exposure to favorable supply and demand fundamentals.
Good relative value compared to other asset classes.
1. Attractive Absolute and Risk-Adjusted Historical Total Returns
Over the past 20 years, total returns for real estate have significantly outperformed stocks and bonds (Figure 1). Core real
estate’s 7.4% 10-year returns are impressive, considering that they encompass the Global Financial Crisis (GFC).
Conventional wisdom suggests that real estate is between stocks and bonds on the risk/return spectrum, but it bears
mention that real estate also offers risk-adjusted returns that are better than or comparable to equities and fixed income
due to its lower volatility (Figure 2).
Figure 1. Core Real Estate Returns Compared to Other Asset Classes, Inflation
14%
12%
11.6%
10.6%
11.5%
11.7%
NCREIF Property Index
S&P 500 Index
Barclays Aggregate Bond Index
12.1%
Inflation
10%
7.4%
8%
6%
9.9%
7.9%
7.4%
6.0%
4.0%
4.1%
3.8%
4%
2%
2.2%
1.7%
1.3%
1.0%
1.0%
5.7%
5.1%
0%
1-Year
3-Year
5-Year
10-Year
20-Year
Source: Barclays Capital, National Council of Real Estate Investment Fiduciaries (NCREIF), Standard and
Poor’s (S&P), Clarion Partners Investment Research, Q2 2016. Past performance is not a guarantee of
future results, and a risk of loss exists.
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Figure 2. Absolute and Risk-Adjusted Returns (Q3 1996 to Q2 2016)
AVG ANN
ANN
RETURN PER
TOT RET
ST DEV
UNIT OF RISK
Real Estate Market Indices
Core Real Estate (NCREIF-NPI)
10.2%
8.3%
1.2
Stock and Bond Market Indices
S&P 500
10.0%
18.8%
0.5
Russell 2000
9.8%
19.4%
0.5
Barclays Aggregate Bond
5.4%
3.6%
1.5
MSCI EAFE
7.0%
20.7%
0.3
Source: Barclays Capital, MSCI, NCREIF, Russell Investments, S&P, Clarion
Partners Investment Research, Q2 2016. Past performance is not a guarantee
of future results, and a risk of loss exists.
2. High Current Income with the Potential to Hedge Inflation and Rising Interest Rates
The investment profile of core real estate suits the present backdrop of an uncertain global financial outlook bracketed by
volatile equity markets and unprecedented low yields in debt markets. With the U.S. labor market near full employment
and wage growth accelerating, the probability of monetary tightening is increasing. Consequently, many investors seek
assets that offer current income growth to mitigate the risks of a rising rate environment. Clarion Partners Investment
Research finds that real estate values are not always adversely affected in periods when interest rates rise because higher
rates often signal economic growth that produces stronger demand for commercial space. That, in turn, usually leads to
net operating income (NOI) gains, which offset upward pressure on cap rates. Core real estate has performed well in most
periods when treasury yields rose since the late 1970s with only two instances where appreciation declined (Figure 3).
Figure 3. Core Real Estate Values Not Always Adversely Affected When Rates Rise
220
+575 bps
(B)
200
180
18%
+348 bps
(C)
+383 bps
(A)
Recessions
NCREIF Apprec. Index (left)
16%
10-Yr Treasury (right)
14%
+240 bps
(D)
12%
10%
+244 bps
(E)
160
+180 bps
(F)
8%
140
6%
+139 bps
(H)
4%
+161 bps
(G)
120
2%
Period
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
Real GDP Growth
1.3%
2.8%
7.8%
3.7%
4.4%
4.9%
3.5%
2.2%
NCREIF Tot. Ret.
17.4%
13.6%
13.3%
7.0%
4.9%
11.4%
15.8%
10.9%
NCREIF Appr. Ret.
10.5%
6.5%
5.2%
-0.3%
-3.6%
2.8%
8.3%
5.0%
3.3%
5.4%
10.6%
50.7%
2.9%
21.1%
11.2%
24.8%
-12.6%
-6.1%
4.3%
-3.8%
-2.3%
-0.8%
2.1%
-1.5%
S&P 500 Tot. Ret.
Barclays Agg. Bond Tot. Ret.
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
0%
1978
100
Source: NCREIF, Federal Reserve, S&P, Clarion Partners Investment Research, Q2 2016.
Note: Returns and GDP growth are annualized over the period of rising rates. Past performance is not a guarantee of
future results, and a risk of loss exists.
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Through professional property management, landlords can drive NOI gains through rental increases during recoveries and
expansions resulting in current income growth (Figure 4). Office and industrial leases are often written to “step up” at the
rate of inflation through the contractual term. In some instances, such as urban core apartment properties, operators have
been able to capture rental growth well above the rate of inflation due to recent phenomena like urbanization and declining
homeownership.
Figure 4. Yield Comparison to Select Fixed-Income Investments
9%
7.8%
4.3%
6%
4.2%
3.3%
2.7%
3%
1.5%
0%
BBB- CMBS
Core Real Estate
U.S. Baa
U.S. Aaa
AAA CMBS (New
(New Issue 10- (ODCE Index) Corporate Bond Corporate Bond Issue 10-Year
Year Avg. Life)
Index
Index
Avg. Life)
U.S. 10-year
Source: Bloomberg, NCREIF, Clarion Partners Investment Research, Q2 2016.
3. Diversification Benefits Within a Mixed-Asset Portfolio
The inclusion of core real estate within a mixed-asset portfolio can enhance returns through asset diversification. Historical
returns have very low or negative correlations with most stock and bond indices (Figure 5). Academic and practitioner
research has long demonstrated that adding core real estate to a portfolio of stocks and bonds enhances the portfolio’s
mean-variance profile.
Large core funds offer additional intra-class diversification because of their exposure to different property types, regions
and metro areas, and industries. As an example, New York City’s office market is highly dependent upon financial services,
while San Francisco’s office market is dominated by tech sector tenant demand.
Figure 5. Core Real Estate Correlations (Q3 1996 – Q2 2016)
NCREIF
NAREIT
EQUITY
NCREIF NPI
NPI
1.00
NAREIT Equity
0.21
1.00
S&P 500
0.21
0.59
1.00
Russell 2000
0.14
0.68
0.90
1.00
(0.10)
0.02
(0.34)
(0.36)
1.00
0.16
0.54
0.87
0.83
(0.30)
Barclays Agg. Bond
MSCI EAFE
SP 500
RUSSELL
BARCLAYS
MSCI
2000
AGG BOND
EAFE
1.00
Source: Bloomberg, MSCI, NCREIF, S&P, Clarion Partners Investment Research, Q2 2016. Past
performance is not a guarantee of future results, and a risk of loss exists.
4. Greatly Improved Market Depth and Liquidity Due to Institutional Capital Flows
The aforementioned return and portfolio characteristics of core real estate combined with increased transparency and
regulatory oversight have helped the asset class to mature over the past two decades. Institutional investors that include
pension funds, insurance companies, and sovereign wealth funds have markedly increased allocations to commercial real
estate to 9.6% by 2015 from 3.7% in 1990 (Figure 6) through a variety of investment vehicles, the most significant being
open-end core funds. Over that time, the market value of the NPI has increased by 13 times to $480 billion from $37 billion
while the number of constituent properties has grown to more than 7,000 from less than 2,000.4 In aggregate, the core
real estate holdings of institutional owners have never been as diversified and transparent as they are today.
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Figure 6. Dramatic Increase in Institutional Allocation to Real Estate
12%
8.8%
9%
6%
3%
2.1%
3.2%
3.7%
4.5%
5.2%
5.6%
2005
2010
9.4%
9.6%
Actual
8.5%
2.9%
0%
1980
1985
1990
1995
2000
2013
2014
2015
Sources: Cornel University Baker Program in Real Estate, Hodes Weill & Associates, 2015
Institutional Real Estate Allocations Monitor, December 2015.
With an estimated investable universe of more than $5 trillion,5 the U.S. commercial real estate market can accommodate
the ongoing need to deploy sizeable amounts of capital productively. In particular, foreign capital flows into the U.S. real
estate market have more than doubled to $91 billion in 2015 from $42 billion in 2007.6
Financial headlines often sensationalize how the flow of capital is compressing real estate cap rates and debt yields for real
estate financing. Many reports neglect to mention how greater capital availability adds depth and liquidity to real estate
capital markets. The 2016 U.S. and Canada edition of the Urban Land Institute’s Emerging Trends in Real Estate identifies this
ongoing trend noting that there are plentiful opportunities to put capital to work apart from trophy projects that attract
headlines.7 Data over the past 20 years shows that the shift in institutional investor allocations towards alternatives – of
which core real estate represents the largest share – is structural and secular in nature rather than cyclical.
5. Exposure to Favorable Fundamentals Resulting from Strong U.S. Demographic and Employment Trends, Low
Development Activity
Real estate investment performance is derivative of economic, employment, and population growth. Supply and demand
fundamentals and capital markets effects are the primary drivers of total returns. The foremost influence upon demand is
the labor market. A tight labor market leads to more people renting apartments, spending at shopping centers, and
occupying office space - among other activities – that in turn generates demand for commercial space, which pushes up
rents and property values.
The broad metrics governing U.S. real estate demand testify to the continued strength and resiliency of the business cycle.
Since the start of the most recent recovery, the labor market has added 6 million jobs above the 2007 employment peak
(Figure 7). With the U.S. close to full employment, wage growth has accelerated to an annual pace of 2.6%, the fastest
since 2009. Consumer spending is increasingly contributing to GDP growth with retail sales now 20.4% above their prior
high.8 U.S. household formation,9 which nearly halted during the Great Recession, has rebounded to an estimated 1.24
million annual pace today, above its 1.19 million long-term average (Figure 8).
Figure 7. Nonfarm Payrolls 6 Million Above Prior Peak
Figure 8. Household (HH) Formation Pace Above Average
1,600
Annual HH Formations Pace
(000s)
Total Payrolls (000,000s)
150
145
140
6 million payrolls
135
130
125
2006
Historical Average
1,200
2008
2010
2012
2014
2016
800
400
0
2006
2008
2010
2012
2014
2016
Source: Bureau of Labor Statistics, Census Bureau, Moody’s Analytics, Clarion Partners Investment Research, July 2016.
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Regarding supply, regulatory and market constraints on construction capital have depressed development activity. First,
new financial industry regulations such as Basel III and the Dodd-Frank Act have curtailed much of the highly risky real
estate lending practices that contributed to the systemic imbalances responsible for the last financial crash. As a result,
lenders, especially banks, have had to maintain conservative lending practices. Second, developers face high and rising
costs for land, labor, and building materials. Most recently, firms report that the costs of acquiring land parcels have made
many projects significantly less profitable and in some cases unviable. Third, development capital has become “smarter”
due to improved transparency, availability, and usability of real estate data. Developers have been able to make informed
decisions and largely avoided the speculative mistakes that preceded prior downturns.
These factors translate into a development pipeline that has lagged demand with some exceptions (Figure 9). There are
certain metro areas and submarkets that have a significant supply overhang and will see low-to-flat NOI growth over the
next two to three years as a direct consequence. Because misreading supply risk will negatively impact property
performance, core real estate investment managers must exercise caution when anticipating competitive projects that are
both underway and planned.
Figure 9: Current and Forecast New Supply Growth Lower than in Previous Cycles
7%
Annual Deliveries as % Stock
6%
1992-2001
Cum. 17.2%
2002-2009
Cum. 12.2%
2010-2015
Cum. 3.7%
Forecast
5%
4%
3%
2%
Ann. Avg. 1.7%
Ann. Avg. 1.5%
Ann. Avg. 0.6%
1%
0%
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F 2019F
(GRAY BAR = RECESSION; DOTTED LINE = ANNUAL AVERAGE)
Source: CBRE Econometric Advisors, Clarion Partners Investment Research, Q2 2016.
Note: Deliveries % is the average of industrial, multifamily, office and retail sectors. Cumulative new supply was
calculated from the beginning of the cycle to the end of recession. Forecasts have certain inherent limitations and
are based on complex calculations and formulas that contain substantial subjectivity and should not be relied
upon as being indicative of future performance.
6. Good Relative Value Compared to Other Asset Classes
How concerned should investors be that core real estate pricing is currently above its 2007 high? When pricing is considered
irrespective of a broader context, many investors would worry. However, when compared to macro factors shaping supply
and demand fundamentals as well as capital markets, core real estate’s relative value becomes apparent. Nominal Gross
Domestic Product (GDP) is 27% above and the S&P 500 Price Index 37.5% above their respective pre-recession highs,10
while the NPI is only 14% above previous peak. Another way to understand this is to compare indices in real terms. As of
Q2 2016, inflation-adjusted core real estate values are just about even with the peak levels of the last cycle while GDP
adjusted for inflation is more than 10% above its previous peak (Figure 10). Since real estate price appreciation is tied to
economic growth, this value disparity suggests that there is even room for property prices to rise, albeit more so in
secondary metro areas.
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Figure 10. Core Real Estate Price Trends Lag the Economy and Equities
Inflation Adjusted Index
(Q4'07= 100)
140
Real S&P 500:126
120
Real GDP:110
100
80
Q2 2016 Real NPI MVI is
0.3% below prior peak: 99
60
40
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg, Moody’s Analytics, NCREIF, S&P, Clarion Partners Investment Research, Q2 2016.
Note: The real S&P500 Price Index excludes dividends and is adjusted for inflation using CPI. The real
NCREIF Market Value Index (MVI) considers only the market value of properties in the NPI and is adjusted
for inflation using CPI.
On average, core real estate also compares favorably to fixed-income instruments. Global bond yields are engaged in a
“race to the bottom” with approximately $13 trillion of foreign sovereign debt offering negative yields.11 In fact, the spread
between the NCREIF cap rate and 10-year U.S. treasury yields was 341 basis points (bps) as of the second quarter,
compared to 72 bps at the 2007 peak and a historical average of 290 bps. Similarly, the spread between the NCREIF cap
rate and Baa corporate bonds is -16 bps versus a historical average of 25 bps (Figure 11). The yield on Baa corporate
bonds is considered a proxy for tenant credit risk.12
Figure 11. Cap Rate Spreads Over Treasuries and Corporates Well Below Prior Peak
Cap Rates Versus BAA Corporate
Current = +50 bps
LTA = +26 bps
2007 Peak = -118 bps
Cap Rates Versus 10Y Treasury
Current = +341 basis points (bps)
LTA = +291 bps
2007 Peak = +72 bps
12%
NCREIF Cap Rate (left)
10%
10%
10%
10-Yr Treasury (left)
8%
8%
6%
6%
4%
4%
2%
2%
8%
6%
8%
Interest Rates
Interest Rates
12%
Spread (right)
4%
6%
2%
4%
0%
Spread (right)
2%
-2%
NCREIF Cap Rate (left)
Baa Yield (left)
-4%
2016
2014
2012
2010
2008
2006
2004
2002
1998
2000
0%
2016
2014
2012
2010
2008
2006
2004
2002
2000
0%
1998
0%
Source: Federal Reserve, NCREIF, Clarion Partners Investment Research, Q2 2016.
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The Positive Outlook for U.S. Core Real Estate
U.S. core real estate investment has a long track record of solid and steady returns. During the 38-year history of the NPI,
there have been only four years with negative total returns (Figure 12). The rebound in core real estate returns during
each of the past two downturns differed according to the underlying causes. The first (1991-1992) was precipitated by
massive oversupply leading to the Savings and Loan crisis. Appreciation returns were negative for several years following
the crash. The second (2008-2009) resulted from a collapse in demand and seizure in credit markets that marked the start
of the GFC. Yet in the year following this “100-year flood” financial market event, real estate total returns rebounded
following a re-engagement of demand and the thawing of credit markets. Clarion Partners believes that a mild downturn
may not derail the current real estate cycle. Looking at 2001-2002, the nation experienced a short and mild recession
following the dot-com bubble and September 11th terrorist attacks. During that period, total returns stayed positive,
although capital returns were slightly negative (Figure 12).
Figure 12. NPI Total Return History Shows 10+ Year Historical Cycles
25%
13 Years of Positive Total Returns
15 Years of Positive Total Returns
2010 - ?
20%
15%
10%
5%
0%
Dot-com Crash
-5%
-10%
-15%
-20%
Appreciation Return
Income Return
Total Return
1991-1992
Severe RE
Oversupply
2008-2009 GFC
-25%
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: NCREIF, Clarion Partners Investment Research, July 2016. Past performance is not a guarantee of future
results, and a risk of loss exists.
Recessions are an inevitable part of every cycle for most asset classes, including real estate. They are extremely difficult
to predict as some notable pundits have learned in prematurely calling the peak of the current real estate cycle. The real
estate market today is different from the one prior to the 2008-2009 downturn. In the two years preceding the last
downturn, the transactions market had become very frothy, with volume spiking by 44% over the previous eight quarters.
Over the most recent eight quarters, transactions volume has risen by less than 20%. Additionally, debt service coverage
averaged 1.37x in the eight quarters prior to the last downturn versus 1.69x over the most recent eight quarters.13 These
two metrics show that today’s market should not be characterized by the excesses that investors witnessed a decade ago.
Maintaining a core real estate allocation for at least six years can mitigate vintage year risk for investors concerned about
entering the core real estate market near the end of the cycle. A hypothetical six-year hold period of the open-end core
real estate fund index would have generated positive returns at any point over the past 30 years (Figure 13). While cyclical
peaks are difficult to forecast, the consistency of income returns makes core real estate a viable investment vehicle for
disciplined investors when potential capital market outcomes are highly divergent or binary.
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Figure 13. Holding the NCREIF-ODCE for Six Years Would Generate Positive Returns Regardless of the Entry Point
160%
Rolling Cumulative 6Y Total Return
Rolling Cumulative 6Y Income Return
120%
Rolling Cumulative 6Y Appreciation Return
80%
40%
0%
-40%
-80%
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: NCREIF, Clarion Partners Investment Research, July 2016. Past performance is not a guarantee of future
results, and a risk of loss exists.
Historically, real estate market cycles tend to last 10 or more years. The current economic cycle has been the slowest of
the post-war era, yet real estate fundamentals have arguably benefited from the nation’s modest growth that has become
a hallmark of the recovery and expansion. While we are in the seventh year of the current cycle, relative valuation metrics
and favorable supply/demand fundamentals point to an extended cycle in which core real estate is well-positioned going
forward.
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Important Information
This report is being provided on a confidential basis strictly for the benefit of its intended recipients and may
not be reproduced, distributed or used for any other purposes. Reproduction or distribution may constitute a
violation of federal or state securities laws.
Target returns are based on a number of assumptions related to the market factors relevant to the proposed investment
strategy, including, but not limited to, interest rates, capitalization rates, supply and demand trends, volume of
development, redevelopment, acquisition and/or disposition activity, development margins and the terms and costs of debt
financing. There can be no guarantee that any of these assumptions will prove to be correct, that the Fund will be successful
in implementing its investment strategy or that target returns will be realized.
This is not an offer to sell, or solicitation of offers to buy, securities. Investments in any Clarion Partners fund or other
investment product can be made only pursuant to such fund’s subscription documents and private placement memorandum
and after careful consideration of the risk factors set forth therein. Investment in a private equity fund entails significant
risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors
able to withstand a total loss of investment.
Unless otherwise indicated, returns are presented on a gross basis and do not reflect any expenses, management fees or
incentive allocations which in the aggregate may be substantial and have the effect of reducing returns. References to
indexes and NCREIF benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of
any actual investment. Investors cannot invest in an index. Past performance is not an indication of future results
and a risk of loss exists. Any investor’s actual returns may vary significantly from the aggregate returns described in
this report. Statements regarding forecasts and projections rely on a number of economic and financial variables and are
inherently speculative. Clarion Partners and any of its officers or employees, including the authors of this report, may have
a position or otherwise be interested in the types of investments or transactions referred to in this publication. Furthermore,
Clarion Partners and its affiliates may provide investment management or other services (including acting as adviser,
sponsor or manager) for one or more investment programs or affiliates or third parties with interests in the types of
investments or transactions referred to in this publication. Forecasts relating to market conditions, returns and other
performance indicators are not guaranteed and are subject to change without notice. Forecasts are based on
complex calculations and formulas that contain substantial subjectivity and no express or implied prediction is made hereby
with respect to any Clarion Partners fund or any other actual investment. There can be no assurance that market conditions
will perform according to any forecast or that any real estate investment program will achieve its objectives or that investors
in any such program will receive a return of their capital.
The information contained in this report, including information supporting forecasts and projections, has been obtained or
derived from independent third party sources believed to be reliable but Clarion Partners cannot guarantee the accuracy
or completeness of such information and has not reviewed the assumptions on which such information is based. This
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actual results may differ materially from those reflected or contemplated in such forward-looking statements. None of
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The Case for U.S. Core Real Estate: Why Invest Now? | September 2016
Endnotes
1
The NCREIF ODCE Index is a capitalization-weighted, gross of fees, time-weighted return index. The inception was January 1978. the
index is a widely referenced as a leveraged core real estate benchmark.
2
Clarion Partners Investment Research. August 2016.
3
This briefing memo makes frequent direct and indirect references to the National Council of Real Estate Investment Fiduciaries
Property Index (NPI) as a benchmark for core real estate. The NPI has been widely regarded as the industry standard for the last 30
years. The NPI is comprised of more than 7,000 properties that are stabilized, investment-grade, and income-producing and held by
tax-exempt fiduciary institutions. The range of property types includes apartments, hotels, offices, retail centers, office showroom, and
warehouses.
4
NCREIF. August 2016.
5
Clarion Partners Investment Research, Urban Land Institute. August 2016.
6
Real Capital Analytics. January 2016.
7
Urban Land Institute. Emerging Trends in Real Estate 2016: U.S. and Canada. September 2015.
8
U.S. Census. August 2016.
9
The Census Bureau defines a household as all persons occupying a housing unit which could be a house or apartment. Household
formation is a more meaningful metric in determining real estate demand.
10
NCREIF. August 2016.
11
Bloomberg. July 2016.
12
The yield on Baa corporates should generally be below the NPI cap rate since the cap rate should also incorporate an illiquidity
premium in addition to tenant credit risk as represented by corporate bond yield.
13
Real Capital Analytics. August 2016. Debt service coverage ratio is calculated using net operating income.
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