Expectations for Institutional Returns Slip

Michael Tucker mtucker@mba.org

December 14, 2017


Institutional investors have increased their expectation for 2018 commercial real estate returns, the Pension Real Estate Association Consensus Forecast Survey said.

The survey asked about investment expectations as represented by the NCREIF Property Index, which measures unlevered institutional real estate returns. Respondents said they expect to earn a 5.6 percent total return (across property types) including income in 2018. When asked the same question three months ago investors said they expected a 5.2 percent total return in 2018.

Total returns across property types could drop to 5.0 percent in 2019, the investors predicted.

Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell noted a clear divide between investors' expected returns from income and from appreciation. "Investment professionals expect commercial properties to continue to provide strong income returns in the coming years, but also expect appreciation returns to tail off," he said.

PREA said investors expect to earn a 4.7 percent income return but only a 1.0 percent appreciation return across property types in 2018.

The divide between investors' expected returns from income and from appreciation may be part of what has pushed property sales down lately, Woodwell noted. "[Perhaps] potential buyers are not seeing the same level of appreciation we have seen the last few years but potential sellers are expecting to continue to receive strong coupons from their properties," he said.

Third-quarter deal volume fell nearly 10 percent year-over-year, Ten-X Commercial reported, noting much of the commercial real estate sector is suffering from stagnating deal volume and pricing due to new supply dampening net operating income growth and a gap between buyers' and sellers' pricing expectations.

Looking at individual sectors, multifamily should see the smallest drop in returns over the next two years, the PREA survey said. Total multifamily returns could fall from their current 6.0 percent to 5.0 percent in 2019. Investors predicted industrial sector returns will likely fall the most, from 11.7 percent currently to 6.3 percent in 2019.

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