The Case for

U.S. Core Real Estate INSIGHTS

SPRING 2023

Carolina Commerce Center, Greer, SC

 THE CASE FOR U.S. CORE REAL ESTATE

Why Core Now?

For more than 30 years, diversified U.S. core real estate has delivered
consistent, competitive income returns, created long-term value
appreciation and reduced portfolio risk.

Over those three decades, technological and demographic trends

have led forward-thinking fund managers to reimagine what core real
estate means. The traditional office and retail assets that made up
original ODCE funds gave way to residential and logistics assets as
the Millennial generation entered the workforce and e-Commerce
changed how the world consumes. COVID-19 highlighted the all-
important work of life scientists, fundamentally changed how and
where we work, and made online shopping a necessity. Post-COVID,
ODCE 3.0 funds rely on next-generation logistics facilities, self
storage, modern responsive offices, life science labs and alternative
housing solutions to deliver superior returns at reduced risk.

While high inflation and soaring interest rates have unsettled equity
and bond markets in the wake of the pandemic, market fundamentals
for ODCE 3.0 sectors match the best periods in history. Funds with
strategic allocations to logistics, self-storage, housing and life science
assets are poised to outperform and deliver steady returns through
this period of upheaval.

300 Third Street, Cambridge, Massachusetts

2 RESEARCH © 2023 CBRE INVESTMENT MANAGEMENT


Vacancy rates by
sector
Source: CoStar (life science,
medical office); CBRE
Econometric Advisors (office,
retail, logistics); RealPage
(apartment). As of October
2022.
For illustrative purposes only.
Current market conditions
differ from prior market
conditions, including during
prior periods of stress and
dislocation. There can be no
assurance any prior trends
will continue.
3 RESEARCH
THE CASE FOR U.S. CORE REAL ESTATE
Real estate market
fundamentals remain
historically strong.
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
90 92 94 96 98 00
Through the pandemic and the
capital market turmoil that has
followed, occupancies for U.S.
logistics, self-storage, life science
and apartments rose to and
remain near all-time highs.
Record-low vacancies have
produced extraordinary rent
gains across these sectors and
promise enhanced cash flows for
years to come.
Powerful macro and structural
drivers support the performance
of these sectors. A vast housing
shortage has consigned would-be
first-time homebuyers to long-
term rentership. Increases
in mortgage rates further reduce
the supply of for-sale housing
Office
Medical Office
Life Science
Retail
Logistics
Apartment
02 04 06 08 10 12 14 16 18 20 22
while raising ownership costs. And
while the extraordinary rent gains
of 2021 are unlikely to continue,
the apartment market is norm-
alizing to pre-COVID conditions
consistent with 3%-4% rent growth
nationally, and 5%-6% growth in
top-performing markets.
In the logistics sector, the
pandemic accelerated secular
trends in online shopping while
supply chain disruptions created
the need for “just-in-case”
inventories. Advances in robotics
and electric vehicles afford
significant productivity gains and
cost savings—but require
specialized facilities featuring next-
generation construction.
© 2023 CBRE INVESTMENT MANAGEMENT
 THE CASE FOR U.S. CORE REAL ESTATE
The pandemic created
unprecedented demand for
self-storage space due to small
business closures, household
migration, and adaptations to
working at home. Families
decluttered to make space for
home offices, while younger
workers left rentals to travel or
temporarily move back home
while working remotely. For
investors, self-storage features
minimal overhead and
operational costs, month-to-
month leases that allow for
regular rent increases, and a
permanently higher user base
post-COVID.
Apartments at 505 Church Street, Nashville, TN
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The case for investment in life
science-oriented real estate is
clear: Highly skilled employees
at deep-pocketed, growth-
oriented firms require specialized
space to solve some of the most
critical problems facing
humanity. Unprecedented public
and private capital supports
these efforts, which require the
mobilization of agile start-ups,
NIH-funded research
institutions, and Big Pharma
alike. Demand has soared,
bringing life science vacancies
into single digits in the premier
nodes of Boston/Cambridge, San
Diego and San Francisco.
Even the office and retail sectors
feature bright spots. Robust
demand for modern, responsive
office space has pushed vacancies
into low single digits for recent
vintage office buildings. And
after a decade of limited
construction and redevelopment
of underperforming shopping
centers, retail vacancies have
fallen into single digits and asking
rents are rising.
Sound market fundamentals,
combined with asset
diversification, low leverage, and
allocations to growth sectors
provide the basis for resilient
cash flows and competitive
returns for core funds.
© 2023 CBRE INVESTMENT MANAGEMENT

NCREIF ODCE
Returns
Source: NCREIF,
as of Q3 2022. Data for 2022
shows average income
return and YTD value
appreciation.
For illustrative purposes
only. Current market
conditions differ from prior
market conditions,
including during prior
periods of stress and
dislocation. There can be no
assurance any prior trends
will continue.
5 RESEARCH
THE CASE FOR U.S. CORE REAL ESTATE
Core real estate delivers
reliable income-driven
returns and long-term
value appreciation.
Since the inception of More recently, core real estate
NCREIF’s NFI-ODCE1 has thrived in the period of
coverage in 1978, income lower interest rates. While cap
returns have averaged 6.9%, rate compression has lowered
or 100bps above the 10-year income returns, value
Treasury yield on average. appreciation has averaged
Core real estate’s income 3.4% per year since 2002,
return has provided 82% of producing average annual
annual total returns over the total returns of 8.8%.
same period.
25%
20%
15%
Value return
10%
5% Income return
0%
5%
Total return
10%
15%
20%
25%
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
Core real estate has In 2008, the collapse of financial
experienced just two periods institutions led to sharp declines
of negative total returns in 44 in asset values and negative total
years. In the early 1990s, returns—but by 2014, investors
vacancies soared after the had recouped losses and earned
overbuilding of the 1980s. 44% in value gains through Q2
2022.
1 The NFI-ODCE is an index of investment returns reporting on both a historical and current basis
the results of open-end commingled funds pursuing a core investment strategy, some of which have
performance histories dating back to the 1970s.
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 THE CASE FOR U.S. CORE REAL ESTATE

Core real estate’s

superior returns feature
lower risk.
Core real estate’s competitive The risk-return profile of core
income returns coupled with real estate has only strengthened
long-term capital appreciation over time: from 2012 to 2021,
has created a return profile NFI-ODCE total returns
that has maximized return per averaged 10.9% with a standard
unit of risk. deviation of just 3.6%, producing
a return per unit of risk metric of
Since inception in 1978, ODCE 2.9.
annual total returns have
averaged 9.0% with an average The analysis actually
standard deviation of 6.2%, understates core real estate’s
resulting in an average return risk-adjusted return advantage,
per unit of risk of 1.1—higher since the majority of the sector’s
than any other major asset volatility comes from positive
class. returns, whereas negative
returns are much more common
for fixed-income, equities and
even REITs.

Trailing 25 Year 10%

NFI-ODCE
9%
Annual Returns by 8%
Listed Real
Estate
Asset Class 7%
Equities
Total Return, %p.a.

6% High Yield
5%
Bonds
IG Corp Bonds
4%
3%
Treasuries
2%
1%
0%
0% 5% 10% 15% 20% 25%
Standard Deviation

1. NFI-ODCE returns, gross-of-fees, as of September 2022

Source: S&P 500, Bloomberg Barclays U.S. Aggregate Government Treasuries Index, Bloomberg Barclays U.S. Corporate
Investment Grade Index, Bloomberg Barclays U.S. High Yield Index, NCREIF Fund Index – Open End Diversified Core
Equity (NFI-ODCE). Figures represent annualized quarterly total returns. as of Sep. 30, 2022
For illustrative purposes only. Current market conditions differ from prior market conditions, including during prior
periods of stress and dislocation. There can be no assurance any prior trends will continue.

6 RESEARCH © 2023 CBRE INVESTMENT MANAGEMENT


Annual total return
by asset class
(correlation to
NFI-ODCE returns
in parentheses)
Source: Source: S&P 500,
Bloomberg Barclays U.S.
Aggregate Government
Treasuries Index,
Bloomberg Barclays U.S.
Corporate Investment
Grade Index, Bloomberg
Barclays U.S. High Yield
Index, NCREIF Fund Index
– Open End Diversified
Core Equity (NFI-ODCE).
For illustrative purposes
only. Current market
conditions differ from prior
market conditions,
including during prior
periods of stress and
dislocation. There can be no
assurance any prior trends
will continue.
7 RESEARCH
THE CASE FOR U.S. CORE REAL ESTATE
Core real estate
diversifies traditional
portfolios
40%
Equity REITs
30% (0.14)
20%
Corporate Bonds
(-0.33)
10% S&P 500
(0.10)
0% 10-Year Treasury
(-0.08)
(10%)
NFI-ODCE
(20%)
(30%)
(40%)
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Modern portfolio theory Core real estate’s correlations to
demonstrates that investors other asset sectors have fallen over
can improve returns and lower time. Based on average correlations
risk by developing a portfolio of to other sectors, the diversification
assets featuring low benefits of adding core real estate to
correlations to each other. a traditional portfolio are as high
today as ever.
Core real estate’s unique
combination of steady income
returns, value appreciation, and
rare negative returns results in
the lowest average correlation
to other asset classes.
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 THE CASE FOR U.S. CORE REAL ESTATE

Core real estate However, concentrations of

funds offer instant
diversification
within commercial
real estate.
Established core U.S. real
estate funds offer another
portfolio benefit: immediate
exposure to a wide range of
markets and property types,
each with its own unique
return profile. Diversification
across the individual assets in
a large fund reduces risk and is
a key driver of the high risk-
adjusted returns delivered by
core real estate.
older assets and exposure to
troubled property types in
legacy funds can weigh on core
returns. Funds with large
allocations to older office assets
face value erosion in the coming
years as leases expire and loans
come due in an environment of
historically high vacancies and
higher interest rates. Many older
malls and other traditional retail
assets face similar challenges.
Funds with higher allocations to
ODCE 3.0 sectors in housing,
modern logistics, self-storage,
and other growth sectors, on the
other hand, are well-positioned
to realize income gains as leases
expire and space is relet at higher
prevailing market rents.

NFI-ODCE annual 50%

NFI-ODCE
total return by 40%
Logistics

property type 30% Apartments

20% Office
Retail
10%
Source: NCREIF, as of Q3
0%
2022.
For illustrative purposes 10%
only. Current market 20%
conditions differ from prior
market conditions, 30%
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
including during prior
periods of stress and
dislocation. There can be no
assurance any prior trends
will continue.

8 RESEARCH © 2023 CBRE INVESTMENT MANAGEMENT

 THE CASE FOR U.S. CORE REAL ESTATE
Why Core Now?
High inflation, rising rates,
capital markets turmoil and
geopolitical uncertainty have
roiled asset markets and clouded
the near- and even medium-term
outlook for equities, fixed-
income and REITs.
U.S. core real estate is not
immune to these factors. Higher
rates have thwarted the use of
leverage to achieve higher
returns, and lenders have
choked off capital for the
troubled office and retail sectors.
Against this backdrop, however,
market fundamentals remain
exceptionally strong for the new
core sectors of modern logistics,
housing, life science and self
9 RESEARCH
storage. For funds allocated to
these sectors, income returns—
based on cash flows from long-
term leases to credit tenants and
rent payments from apartment
renters—remain intact. And
soaring rents promise enhanced
cash flows as logistics and life
science leases expire over the
coming years.
The case for core real estate is as
strong today as ever. Stable cash
flows underpin total returns, and
positive market fundamentals
support income gains.
Opportunities to acquire
generational assets amid market
turmoil will position core funds for
another era of outperformance.
Storage Partners II, Boulder, CO
© 2023 CBRE INVESTMENT MANAGEMENT
 Disclaimer
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Contact
Larissa Belova Justin Shanahan Bernie McNamara Shane Taylor
Portfolio Manager Deputy Portfolio Manager Head of Client Solutions Head of US Research
U.S. Core Partners U.S. Core Partners Bernie.Mcnamara@cbreim.com Shane.Taylor@cbreim.com
Larissa.Belova@cbreim.com Justin.Shanahan@cbreim.com

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10 RESEARCH © 2023 CBRE INVESTMENT MANAGEMENT