Institutional Investors Lower Their Return Expectations

Institutional investors dramatically decreased their expectations for 2020 commercial real estate returns, the Pension Real Estate Association’s Consensus Forecast Survey reported.

PREA surveyed 22 investment managers, consultants and researchers about their expectations for unlevered institutional real estate returns represented by the NCREIF Property Index. Respondents said they expect a negative 4.0 percent total return across property types this year including income. In the same survey one year ago investors said they expected a 6.3 percent positive total return in 2019.

PREA said investors now expect to earn a 4.0 percent income return across property types this year but expect a negative 7.9 percent return for property appreciation, yielding a negative 4.0 percent bottom line.

PREA said investors expect to earn 3.6 percent across sectors next year, composed of 4.7 percent income growth and a negative 1.1 percent property appreciation rate. In 2022 the bottom line return could increase to 7.6 percent, made up of 4.7 percent income return and a 2.9 percent appreciation return.

Investors expect industrial assets to perform best–in fact they are the only property type expected to generate positive returns this year, PREA said. Industrial assets should see a 1.9 percent total return in 2020, made up of a 4.3 percent income return and a negative 2.4 percent appreciation rate.

The apartment sector’s expected returns ranked second at negative 2.2 percent for the year, followed by office at negative 4.8 percent and retail at negative 11.2 percent.

PREA recently reported nearly all institutional real estate investors have seen deals fall through due to the COVID-19 pandemic. Nearly 90 percent of investors surveyed said their organizations have seen previously agreed-to transactions collapse due to financial market volatility or pandemic-related travel struggles. Just over two-thirds of firms surveyed said they had seen cancelled deals when asked the same question in March.