Private assets

U.S. core property offers the best entry point in many years

July 10, 2025 - 6 min

Investors across the globe have long sought to add the return characteristics of U.S. core real property investment to their multi-asset portfolios. We believe the portfolio attributes of U.S. core property investment have been well documented: competitive risk-adjusted returns, low correlation with other asset classes, high current yield and a tendency to act as an inflation hedge through long-term real price appreciation. In response to the dramatic change in U.S. interest rate policy during 2022 and 2023, U.S. core property has re-priced significantly and may now present a more attractive entry point for investors than in recent years. To this point, the average yield on a property owned by an institutional investor is now at the highest level of the past ten years.

Average U.S. Commercial Property Yield at Highest Level Since 2015

Source: NCREIF Property Index (NPI), as of 2025 Q1\

What is Core Property Investment?

Core property generally refers to high-quality, well located, income-producing properties with stabilized rent rolls and durable income streams. This segment is the largest and most liquid institutionally owned component of the more than $20 trillion U.S. commercial property market¹. Historically, most core portfolios were heavily weighted to large trophy office and mall assets but the composition of the typical core portfolio has changed significantly over the past decade, particularly in the post pandemic period. AEW believes that property exists to serve the needs of tenants. As the ways people live, work, and spend their leisure time have evolved, so too has the relevance of certain properties and property types. Today, industrial (logistics) properties represent the single largest category in the U.S. core fund universe, while office and retail have declined in significance. Additionally, various sub-categories within these groups as well as new categories outside of the traditional four major sectors continue to increase in representation within most core investment strategies. For example, NCREIF has recently expanded property type representation within their widely used performance indexes to include self-storage and seniors’ housing properties as distinct property sectors while also expanding their definition of “sub property types to include areas as diverse as medical office and life science properties². Going forward, we expect property type representation within core portfolios to continue to expand.

Core property investors typically expect most of their return to come from current income, with a much smaller reliance on future property price appreciation. Over the past 20-30 years, approximately 75% of core total return has come from income with only 25% coming from appreciation. Additionally, most core investment strategies do not employ a significant amount of financial leverage to achieve their expected return. Today, for example, the overall leverage ratio for U.S. ODCE funds³ sits at slightly less than 27%.

Property Type Composition of U.S. Core Diversified Open Ended Equity (ODCE) Universe

Source: NCREIF, as of 2025 Q1

Core Property Returns – How Much Comes from Income

Source: NCREIF, as of 2025 Q1, Past performance does not predict future returns.

Private direct commercial property investment can also provide significant diversification benefits to multi-asset portfolios. Over the past ten years, the NFI-ODCE Index shows negative total return correlation to broad measures of equity and fixed-income investment as shown.

Correlation of Quarterly Total Returns June 2015 – March 2025

Source: NCREIF, Factset, Past performance does not predict future returns.

Inflation Protection

Numerous studies have demonstrated that core commercial property provides partial inflation hedging characteristics. Recent research suggests that most of this is attributable to rising replacement costs during periods of higher inflation as values of existing properties rise in step with rising construction costs. In most periods, both inflation and property appreciation move in more normal ranges without any clear relationship but the data clearly show a stronger relationship between core property appreciation (or depreciation) and inflation during periods of high and low inflation/deflation.

Year-Over-Year Changes in the CPI and the ODCE Capital Value Index, 1978-2024

Source: NCREIF, Bureau of Labor Statistics (BLS)

Conclusions

Core property can provide many desirable benefits for most investors, including stable and growing income, diversification with other asset classes and partial inflation hedging, and has a clear and demonstrable role in multi-asset class portfolios. Core property has meaningfully re-priced over the past two years in step with the broader changes in interest rates. Today, we find the sector to be at the beginning of the next valuation up-cycle and believe that the entry point for capital is the most attractive in many years. Property ultimately exists to serve tenants and can only be as healthy as the tenants and, by extension, the economy that it serves. The ways that tenants use and experience property changes over time in step with broader social, economic, and demographic changes and the universe of investable core properties changes in response. Today’s core property market is more diverse, dynamic and, by extension, resilient than it has ever been, and we fully expect this evolution to continue in step with the broader forces shaping our economy.

¹ Federal Reserve, Financial Stability Report. April 2025.

² Current NCREIF reported property types and sub property types include: Hotel: Full Service, Industrial: Flex, Industrial: Life Science, Industrial: Manufacturing, Industrial: Specialized, Industrial: Warehouse, Office: Central Business District, Office: Life Science, Office: Medical Office, Office: Secondary Business District, Office: Suburban, Office: Urban, Other: Data Center, Other: Operating Land, Other: Other, Other: Parking, Residential: Apartment, Residential: Manufactured Housing, Residential: Single Family Rental, Residential: Student Housing, Retail: Mall, Retail: Street, Retail: Strip, Seniors Housing: Assisted Living, Seniors Housing: Independent Living.

³The NFI-ODCE is a capitalization-weighted, gross of fee, time-weighted return index with an inception date of December 31, 1977. Open-end Funds are generally defined as infinite-life vehicles consisting of multiple investors who have the ability to enter or exit the fund on a periodic basis, subject to contribution and/or redemption requests, thereby providing a degree of potential investment liquidity. The term Diversified Core Equity style typically reflects lower risk investment strategies utilizing low leverage and generally represented by equity ownership positions in stable U.S. operating properties. The NFI-ODCE, like the NCREIF Property Index and other stock and bond indices, is a capitalization-weighted index based on each funds Net Invested Capital, which is defined as Beginning Market Value Net Assets (BMV), adjusted for Weighted Cash Flows (WCF) during the period. To the extent WCF are not available; which may be the case for older liquidated funds, BMV is used. Indices are typically capitalization-weighted, as they better represent the universe and the performance of the overall marketplace. Total Return of any capitalization-weighted Index is, therefore, more influenced by the larger funds (based on Net Invested Capital) included in the Index. Additional information, such as the equally-weighted NFI-ODCE, is also presented to show what the results would be if all funds were treated equally, regardless of size. This presentation is typically used for statistical purposes and peer-to-peer comparisons.

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