AFIRE: Yield targets need to come down

Amid somber growth prospects for the US economy and its real estate markets, attendees at AFIRE's annual conference were told some managers are still "lying to themselves" about return expectations.

Fund managers need to be more realistic about return expectations as the US economy faces its “worst, lousiest, crumiest” recovery in post-war history.

As the annual Association of Foreign Investors in Real Estate (AFIRE) conference kicked off in Washington DC today, delegates were warned that yield targets for the industry “need to come down a lot,” not least owing to prospects for real estate rental growth.

Steven Kohn

During an opening panel discussion, Steven Kohn, president and principal of Cushman & Wakefield Sonnenblick Goldman, told delegates that, while he is “bullish” on transaction volume in the coming 15 months, “yield targets need to come down a lot. IRRs are always slow to react … [but] the yield targets of some groups still have to [react]. That's why they're not getting the deals done.”

Kohn was joined by Russ Appel, president of The Praedium Group, who also called for the industry to be “more realistic about their expectations”. Appel argued that, while most real estate investment managers were underwriting lower returns, some were assuming “higher than realistic growth. They are … lying to themselves.”

The AFIRE conference earlier had been presented with a somber economic forecast by Dr Allen Sinai, chief global economist of Decision Economics, when he predicted the current downturn would be the “worst, lousiest, crumiest” in the US' post-war history, coupled with the “mother of all jobless recover[ies].” Predicting annual growth rates for the US of roughly 2 percent per year “for a long number of years,” Sinai said it “set a bleak backdrop for real estate in the US.”

However, Appel insisted that the US' aging demographics and its search for yield could result in greater demand for real estate investments as the asset class overall offered a fixed income investment with some growth prospects.  “It's going to keep demand for real estate assets high.”

Jeffrey Sussman, president of developer Louis Dreyfus Property Group, also added that a lack of supply in some key US markets would help drive demand for real estate – and help fuel short-term spikes in rents. “I do think there's going to be a spike in rents in a couple of cities,” he said. “That's going to help people who want to own real estate and will be a factor in helping them keep cap rates down.”