The results of the latest consensus forecast survey from the Pension Real Estate Association (PREA) show that respondents expect total unlevered return growth on commercial real estate assets traded at the institutional level to moderate in 2019. Respondents expect that total returns on all commercial property types, as represented by the NCREIF Property Index (NPI), will average 5.7 percent next year vs. 7.1 percent in 2018 and will decline to 4.4 percent in 2020.
Return growth will decline the most for industrial properties, with an expected average return of 8.2 percent compared to 12.4 percent this year. By 2020, survey respondents expect returns on industrial acquisitions to slow to 5.7 percent, PREA reports.
Retail properties, on the other hand, will likely experience slightly higher returns in 2019, at 4.3 percent, indicating a 10-basis-point increase from 2018, in survey respondents’ estimate. By 2010, however, respondents forecast returns on retail acquisitions to average 3.8 percent.
The declines will likely come from slowing appreciation in asset values, as returns from income are expected to remain fairly stable from 2018 through 2010, moving by at most 20 basis points for all four core property types covered by the survey. However, survey respondents forecast that both office and retail properties will experience negative return appreciation by 2020—by 0.7 percent and 1.0 percent respectively.
Meanwhile, appreciation returns for industrial and multifamily properties are expected to moderate. Appreciation returns in the industrial sector will likely move down to 3.9 percent in 2019 and 0.9 percent in 2010, in respondents’ views, from 7.4 percent today. Appreciation returns on multifamily properties are forecast to move to 1.4 percent next year and 0.3 percent in 2020, from 1.9 percent in 2018.
The PREA survey was conducted in November 2018 and included responses from 27 firms, with specialties ranging from investment management to real estate consulting services and research.