Pension Funds Lower Their CRE Returns Outlook for 2018-2019


Looking ahead to the next few years, members of the Pension Real Estate Association (PREA) expect lower returns on commercial real estate investments than they will achieve in 2017. The fourth quarter 2017 PREA Consensus Forecast shows that respondents anticipate getting a total return, including income, of 5.6 for all property types on the NCREIF Property Index in 2018 and 5.0 in 2019. Both figures are below the forecasted return of 6.9 through the end of 2017.

Survey participants expect total returns on industrial and office properties to drop the most over the two-year period. Returns on industrial assets are expected to decline from 11.7 in 2017 to 6.3 in 2019. Returns on office properties are forecast to move from 5.9 to 4.4 on the NCREIF Property Index during the same period.

Total returns on apartment properties, on the other hand, are expected to show the most stability. Survey participants indicated they believe returns in the sector will go from 6.0 this year to 5.3 in 2017 and 5.0 in 2019.

Returns in the retail sector are expected to decline from 5.9 at year-end 2017 to 4.7 in 2019.

Drilling down further, survey results show that PREA members believe lower returns will be driven primarily by a slowdown in appreciation rather than property incomes. In both the retail and industrial sectors, for example, income returns are expected to remain flat from 2017 through 2019. But for retail properties, appreciation return is forecast to come down from 1.2 this year to 0.0 in 2019. In the industrial sector, appreciation return is expected to go from 6.23 to 1.2 during the same period.

Income returns are expected to go up slightly for office and apartment properties (from 4.5 to 4.6 in 2019 for both). But survey respondents expect appreciation return to move from 1.3 to a negative 0.3 for office properties, and from 1.6 to 0.5 for apartment properties by 2019.

The survey was conducted in November and included responses from a total of 24 firms.

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