Expectations for Institutional Returns Grow

Institutional investors increased their expectations for 2015 returns over the last three months, led by income growth, a new survey reported. 

The PREA Consensus Forecast of Commercial Real Estate Returns asked about investment expectations as represented by the NCREIF Property Index, which measures unlevered institutional real estate returns gross of management fees. Respondents said they expect to earn an 11.5 percent return this year, up from expectations of 10.6 percent three months ago and 9.8 percent in March.  

“The forecast anticipates that over the next two years property income returns will continue at a healthy pace, but that growth in property values, while still positive, will decline to a third of this year’s anticipated rate,” said MBA Vice President of Commercial and Multifamily Research Jamie Woodwell.  

Investors forecast a 7.2 percent return between now and 2017, the survey said. Most of that return–more than a five percent rate–will come from property income growth compared to 2.1 percent property appreciation return.   

Tom McNearney, chief investment officer with Transwestern, Houston, called the results unsurprising. “As a group, the survey respondents clearly expect we are facing a rising interest rate environment, which would chill any further cap rate compression,” he said. “They are forecasting rising income, which reflects confidence in the economy continuing to slowly improve, translating into rising occupancies and rental rates–and therefore rising net operating incomes.”  

McNearney said the fact that incomes are rising and appreciation returns are expected to fall suggests that these investors expect cap rates to increase somewhat. “All of this is consistent with previous rising-rate environments when new construction was somewhat restrained,” he noted. 

Woodwell agreed. “The forecast paints a relatively ‘soft landing’ to total returns and values as interest rates and cap rates are expected to rise,” he said. 

Investors have the highest expectations for industrial properties, forecasting a 12.4 percent total return in 2015, the survey said. Retail and office properties followed with forecasted returns of 12.1 percent and 11.6 percent, respectively. Institutional investors expect apartments to yield a 10.1 percent total return this year.    

Looking ahead, institutional investors expect to earn 7.8 percent across sectors between now and 2019; six months ago they expected to earn 8.1 percent over that time, the survey said.