Institutional Investors Expect Higher Returns

June 14, 2018

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

The group’s Consensus Forecast 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 6.2 percent total return across property types this year including income. When asked the same question in March investors said they expected a 6.0 percent total return in 2018.

Total returns across property types could drop to 5.0 percent in 2019, the investors predicted. In March they expected to earn 5.3 percent in 2019.

The survey indicated investors are increasingly looking to property income as the driver of commercial real estate returns, said Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell. “Economic growth is expected to support stable income returns, even as rising interest rates–and their expected push on cap rates–may eat into appreciation.”

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.

Woodwell observed one side effect of these expectations: “there seems to be an increased interest in value-add properties as investors look for areas where appreciation returns may buck the expected trend,” he said.

Investors expect industrial assets to generate the highest returns–9.5 percent–this year, PREA said. Office and apartment properties followed with 5.8 percent expected returns, followed by the retail sector with a 4.6 percent total expected return.

Earlier this year PREA asked institutional investors how much they expect to allocate to commercial real estate investment 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.