Return Expectations Grow Among Institutional Investors

Institutional investors are increasing their expectation for full-year 2018 commercial real estate returns, the Pension Real Estate Association’s Consensus Forecast Survey reported.

The PREA survey of 27 investment managers, consultants and researchers found they expect to earn a 7.1 percent total return across property types this year including income.

Commercial real estate investor expectations have generally increased throughout 2018. When asked the same question in August investors said they expected to earn a 6.2 percent total full-year return. An early 2018 survey found at that time they expected a 6.0 percent total return for the year.

Investors expect to earn a 5.7 percent total return across property types in 2019, the report said. In August they said they expected to earn 5.3 percent next year.

Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell said uncertainty about where interest rates and cap rates might be headed is causing commercial real estate investors to look to cash flows rather than property appreciation as the key driver of returns in coming years.

PREA said investors now expect to earn a 4.6 percent income return but only a 2.5 percent appreciation return across property types in 2018.

“Income is expected to account for $4 out of every $6 of total returns in 2018, $5 of every $6 of total returns in 2019 and for all of the positive contribution to returns in 2020,” Woodwell said. “[But] even with some of the recent economic uncertainty, investors see commercial real estate incomes remaining strong.”

Investors expect industrial assets to generate the highest returns–12.4 percent–this year, PREA said. This represents a significant increase from the 11 percent return cited in August. Office and apartment properties followed with 6.7 percent and 6.3 percent expected returns respectively, followed by 4.2 percent for the retail sector.

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.