Institutional Investors Downgrade 2019 Return Expectations

Institutional investors are decreasing their expectation for 2019 commercial real estate returns, the Pension Real Estate Association’s Consensus Forecast Survey reported.

PREA surveyed 26 investment managers, consultants and researchers about their expectatons for unlevered institutional real estate returns represented by the NCREIF Property Index. Respondents said they expect to earn a 6.5 percent total return across property types this year including income. When surveyed in December 2018, investors expected a 7.1 percent total return in 2019.

Jamie Woodwell, Vice President of Commercial Real Estate Research with the Mortgage Bankers Association, noted investors continue to see commercial real estate as an asset class that will provide steady income in coming years. “But the survey also shows expectations of a downward drift in returns from property appreciation,” he said. “A key question is how investors will adjust to today’s low interest rate and return environment, and whether those adjustments begin to put some upward pressure on commercial and multifamily property values.”

PREA said investors now expect to earn a 4.5 percent income return across property types but only a 2.0 percent appreciation return for the year.

That gap could grow going forward. The PREA report said investors expect to earn 5.3 percent across sectors next year, composed of 4.5 percent income growth but only 0.8 percent appreciation return. In 2021 the bottom-line return could fall to 4.5 percent, made up of 4.6 percent income return and a negative 0.1 percent appreciation return.

Investors expect industrial assets to generate the highest returns for at least the next few years, PREA said. Industrial assets should see an 11.7 percent total return this year (4.7 percent income and 6.9 percent appreciation). Investors expect industrial total returns to equal 8.2 percent next year and 6.1 percent in 2021.

Office sector expected returns ranked second at 6.3 percent for this year, followed by apartments at 6.0 percent and retail at 2.8 percent. Starting next year apartment returns are expected to move into second place behind industrial at 5.4 percent compared to 5.0 percent for office assets.