Institutional Investors Lower Their Expectations

Michael Tucker mtucker@mba.org

June 14, 2019


Institutional investors lowered their expectation for commercial real estate returns, the Pension Real Estate Association's Consensus Forecast Survey reported yesterday.

PREA surveyed 25 investment managers, consultants and researchers about their forecasts for unlevered institutional real estate returns as represented by the NCREIF Property Index. Respondents said they expect to earn a 6.3 percent total return across property types this year including income. When last surveyed in December 2018, investors expected a 7.1 percent total return in 2019.

PREA said investors now expect to earn a 4.4 percent income return across property types but only a 1.9 percent appreciation return for the year.

Jamie Woodwell, Vice President of Commercial Real Estate Research with the Mortgage Bankers Association, said commercial real estate investors expect to see growing property incomes and slowing property appreciation, "likely tied to the prospect that cap rates are at historically low levels and are not likely to continue their declines."

PREA said respondents expect that gap to grow going forward. Investors expect to earn 4.9 percent across sectors next year, composed of 4.4 percent income growth and 0.5 percent appreciation return. In 2021 the bottom-line return could fall to 4.2 percent, made up of 4.5 percent income return and a negative 0.3 percent appreciation return.

Investors expect industrial assets to generate the highest returns--10.4 percent--this year, PREA said. This represents a significant drop from the 12.4 percent expected return they cited last December. Office and apartment properties followed with 6.0 percent and 5.8 percent expected returns respectively, followed by 3.8 percent for the retail sector.

"Differences between property sectors follow the macro trends with higher long-term expectations for industrial and apartments and lower expectations for office and retail," Woodwell said.

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