Return Expectations Grow Among Institutional Investors

Michael Tucker

September 13, 2018

Institutional investors are increasing their expectation for full-year commercial real estate returns, the Pension Real Estate Association Consensus Forecast Survey reported.

The survey asked about investment expectations as represented by the NCREIF Property Index, which measures unlevered institutional real estate returns. In August, respondents said they expect to earn a 6.6 percent total return across property types this year including income. When asked the same question in May investors said they expected a 6.2 percent total return in 2018.

In a February survey investors said they expected to earn a 6.0 percent total return in 2018.

Investors expect to earn a 5.3 percent total return across property types in 2019, the report said. In May they said they expected to earn 5.0 percent next year.

The survey reinforces a shift in focus from appreciation to income as the key driver of investor returns in coming years, noted Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell. "Rising interest rates are expected to put pressure on cap rates, but investors anticipate a strong economy will support property incomes and help to sustain overall property investment returns," he said.

PREA said investors now expect to earn a 4.7 percent income return but only a 1.5 percent appreciation return across property types in 2018.

Investors expect industrial assets will generate the highest returns--11 percent--this year, PREA said. This represents a significant increase from the 9.5 percent return cited last quarter. Office and apartment properties followed with 6.3 percent and 6.0 percent expected returns respectively, up from 5.8 percent three months ago. Expected returns for the retail sector stayed flat at 4.6 percent.

Earlier this year PREA asked institutional investors how much they expect to allocate to commercial real estate rather than to rival investments going forward. The average investor now targets more than 10 percent of total capital for real estate, suggesting continued positive sentiment toward real estate in general and private market real estate in particular, PREA said.

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