PREA: 2012 CRE Returns Will Rise to Nearly 10 Percent

Commercial real estate firms expect the future of the U.S. commercial real estate market to continue to shine, as indicated by the results of the Pension Real Estate Association's latest Consensus Forecast Survey: Survey participants in May anticipate full-year 2012 returns of 9.6 percent.

Commercial real estate firms expect the future of the U.S. commercial real estate market to continue to shine, as indicated by the results of the Pension Real Estate Association’s latest Consensus Forecast Survey. Looking at the consensus forecast of real estate returns represented by the NCREIF Property Index, the 22 investment managers, advisors and researchers who participated in PREA’s survey in May anticipate full-year 2012 returns of 9.6 percent.

Looking at the different property types, the apartment sector remains head and shoulders above the rest with projected returns of 10.7 percent for 2012. The expectation for returns in the office and retail sectors is a respective 8.7 and 9.1 percent. However, it is the 9.4 percent projection for industrial real estate that is turning heads.

“Industrial is a surprise because, in a lot of past surveys, anecdotally, it’s been viewed as the weak sister of the four main property types,” Greg MacKinnon, Ph.D., director of research with PREA, told Commercial Property Executive. “In many ways, given the story that’s been behind apartments for so long, there has been some worry recently among some investors that maybe the [apartment] sector is getting overpriced, and by the same token perhaps industrial underpriced. As people start looking at the pricing in the different sectors, maybe they are starting to come across industrial.”

The breakdown on the predicted returns for industrial is 6.3 percent income return and 3.1 percent appreciation. The respective numbers for the apartment sector are 5.3 percent and 5.4 percent. In the retail sector, the forecast is for income returns of 6.3 percent and appreciation returns of 2.8 percent, and a respective 5.8 and 2.9 percent in the office sector.

“They do seem to continue to see some fairly good growth in net operating income over the next few years,” MacKinnon said of the survey respondents’ predictions. For all property types, the annual income return from 2012 to 2016 will average out to approximately 5.9 percent. “Nothing spectacular, but on a national level for all property types, the implication of these average forecasts is for at least above inflation growth in net operating income,” he noted. “Given the economic circumstances right now, that’s certainly a vote of confidence in the strength of the commercial property market.”

It appears 2012 will be a good year; however, positive growth cannot go on forever.  The numbers forecasted for future overall returns drop to 7.9 percent in 2013 and continue to decline to 7.7 percent in 2014. For the five-year period ending in 2016, overall returns will average out at 8.1 percent.

“A slowdown in the market is being forecast but you have to take [other factors] into consideration,” MacKinnon said. “Given the interest rate environment now, 7.7 percent is still a fairly healthy return. Ten-year treasuries are yielding 1.6 percent; a 7.7 percent forecast return in 2014 is a pretty good return actually. They’re forecasting a slowdown but slowdown is a relative term.”