The Performance of Real Estate Investment Strategy Across Multiple Cycles: A Comparison of Core and Non-Core Strategies Based on A New Dataset and Industry Interviews

Abstract

In the wake of the COVID-19 pandemic, the real estate capital markets have been thrust into a realm of heightened uncertainty, primarily due to fluctuating federal funds rates and rapidly changing economic conditions. This thesis delves into the intricate dynamics of Core and NonCore private equity real estate strategies in response to these turbulent times. The research aims to dissect and understand the performance and strategic adjustments in real estate investment amidst changing capital market cycles, particularly in the post-pandemic landscape. Using a new source of data from the MSCI Property Index and NCREIF Research database, the study analyzes historic performance trends across strategies since 2000, identifying a strong correlation between market fundamentals and private real estate returns. The analysis highlights the superior performance of Development strategies in the Sunbelt and Southwest regions, contrasted with the decline of Rehabilitation/Repositioning strategies in West Coast markets, and it reflects a shift in office sector demand. The thesis also explores market expectations and strategic responses during the high-interest rate environment and secular market changes of the fourth quarter of 2023. Qualitative insights from 21 industry professionals point to a transition from falling values in 2023 to value recovery in 2024. The interviews also signal the short-term opportunities for Core/Core-plus strategies in the forthcoming lower-rate environment, as inflation eases. The thesis also underscores the importance of aligning investment strategies with thematic investment trends, as evidenced by the success of development strategies in certain regions. The thesis posits that while investment style affects return and volatility, the overarching drivers of long-term returns across strategies are thematic trends and the broader market environment, including access to capital, leverage opportunities, and secular shifts. The study advocates for a holistic approach to investment decisions, considering thematic trends and market dynamics beyond just the immediate return and volatility differences.