Hi. I'm Rich Hill, and welcome to the latest edition of Inside Real Estate Today. I've been on the road over the past month meeting with a wide variety of investors. I want to share with you three key questions that we're receiving from them. First, how are you thinking about returns for private real estate in the years ahead? Second, what is the driver of those returns? And then, number three, how are you thinking about the debt markets today?

We previously discussed our outlook for the next-year returns of about five percent total returns as income returns offset modest capital returns. We didn't get a lot of pushback on those views, but investors started to ask us, what about the next five and ten years? Over the next five years, we think total returns can be in the seven percent range or so. But over the next ten years, we think they will rise to around eight to nine percent, which will be in line with historical averages.

Investors were also asking us, what do we think about increasing returns? We think you can do that through property type selection and vehicle selection. What do I mean by vehicle selection? Well, I think there's an increasing focus on development to core, value add, and opportunistic. If you look at all of these strategies in unison, we do think you can achieve returns in the high single digits to even low double digits.

We're getting questions about what is going to drive our total return forecasts. Over the past one to two decades, a big portion of the return was driven by cap rate compression, as interest rates were in a secular decline. We think the days of financial engineering are likely behind us. The primary driver of returns over the next ten years, or the next cycle, if you will, are going to be driven by fundamentals, or net operating income growth. One property type might do a lot better than another property type.

Said another way, we think you're going to see greater disparity across return profiles. This is important because the commercial real estate market has become much more diversified over the past ten years. It's no longer dominated by the "core four" and has become much more of a new economy asset class. Sectors like industrial, data centers, seniors housing, single-family rental, and even cell towers in the public markets are now an increasingly large portion of the commercial real estate market.

Finally, what opportunities are you seeing in the debt markets? Bottom line, we think direct lending is compelling right now on an absolute and risk-adjusted basis. Yields are higher given higher risk-free rates and wider spreads, given less competition. And risk-adjusted returns are compelling given lower loan to values and lower property prices, which mitigate the risk of further declines in property valuations.

We're seeing demand for various different types of properties, including office. Finally, we're often asked, what do we think about liquidity? For investors that want more liquidity, we think the single-asset / single-borrower CMBS market is effectively liquid private credit.