Chart of the week

Income will likely drive CRE returns again

As the CRE market reverts toward a more normalized environment, income-centric strategies could return to favor.

Subscribe to the Chart of the week newsletter
January 31, 2025 | 2 minute read

Commercial real estate returns by decade

Column chart showing the breakdown of commercial real estate (CRE) returns by decade. Income represented the large majority of CRE’s total return during the 1980s, 1990s and 2000s. During the 2010s, price appreciation drove returns fueled by the Fed’s extended zero interest rate policy combined with a steady decline in capitalization rates. Income has again played its customary role in the current decade as the market reverts toward a more normal environment favoring income- centric strategies.

Source: NCREIF ODCE Index, as of Q3 2024, latest data available.

  • Following two challenging years, the CRE market enters 2025 with the wind at its back, fueled by strengthening fundamentals, growing investor confidence and stabilizing interest rates.
  • CRE property price declines have largely abated, yet the recovery ahead is unlikely to mirror the 2010s, when price growth was fueled by the Fed’s extended zero interest rate policy (ZIRP) combined with a steady decline in capitalization rates. 
  • In fact, the 2010s were an anomaly in CRE investment returns over the past four decades as double-digit returns were driven primarily by price appreciation, with less than half coming from income.
  • As the chart shows, CRE has been an income-driven asset class throughout its history, with price appreciation generally playing a more modest role (and usually deriving from growth in property income).
  • Today, we have seen income drive CRE returns once again, a pattern that could remain in place as the market reverts toward a more normal environment favoring income-centric strategies. The double-digit rates of returns of the last decade could be harder to come by, but elevated yields could lead to healthier income generation.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site