Expectations for Institutional Returns Increase
Institutional investors have increased their expectation for commercial real estate returns, the Pension Real Estate Association’s Consensus Forecast Survey said.
The 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 6.0 percent total return across property types this year including income. When asked the same question three months ago investors said they expected a 5.6 percent total return in 2018.
Total returns across property types could drop to 5.3 percent in 2019, the investors predicted.
The results give insight into what might be slowing sales volumes, said Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell, noting Real Capital Analytics, New York, reported January transaction volume fell by 3 percent from a year ago.
“The survey shows that investors expect income returns to remain strong in coming years, but also expect appreciation to slow,” Woodwell said. “Potential buyers may be put off by the appreciation outlook, but potential sellers–given an expectation of strong income returns–may see little incentive to sell, particularly if they can tap finance markets to lock in low rates and re-leverage the property.”
PREA said investors expect to earn a 4.7 percent income return but only a 1.3 percent appreciation return across property types in 2018.
Investors expect industrial assets to generate the highest returns–8.9 percent–this year, PREA said. Office and apartment properties followed with 5.6 percent and 5.4 percent expected returns, respectively. The retail sector has the lowest expected returns, just 5.1 percent.
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.
