PREA Survey Shows Commercial Real Estate Growth Expected to Slow

The Pension Real Estate Association's newly released results of its latest Consensus Forecast Survey of the U.S. commercial real estate market showed a positive outlook for 2014, although things are expected to slow down in the ensuing years.
Greg MacKinnon

Greg MacKinnon

By Keith Loria, Contributing Editor

The Pension Real Estate Association’s newly released results of its latest Consensus Forecast Survey of the U.S. commercial real estate market showed a positive outlook for 2014, although things are expected to slow down in the ensuing years.

According to the report, forecasts for increasing full-year 2014 returns are due to the market continuing to surprise to the upside, with the first half of 2014 having again seen strong returns on commercial real estate overall.

“The general theme seen in the results is that while 2014 is shaping up to be another strong year for commercial estate, the average forecaster sees returns slowing going forward,” Greg MacKinnon, PREA’s director of research, told Commercial Property Executive. “Not a reversal in the market, certainly, but a slowdown, with 2015 returns expected to be lower than this year and 2016 lower again. Over 2015-16, the returns are still predicted to be good, but not as strong as we have seen over the last couple of years.”

Still, the survey shows that the outlook for 2015 has been getting more bullish in the last two quarters, which is likely due to an increased acceptance that the U.S. economy is finally gaining momentum, combined with a reduction in the fear that the market could be derailed by interest rate increases.

According to the average forecast, it looks as if the next year is going to see good returns, although perhaps not as strong as they have been over the last couple of years.

“Still, a forecast return of 8.6 percent overall for 2015 would be considered quite attractive, given the low interest-rate environment in which we continue to find ourselves,” MacKinnon said. “Of course, there is risk involved and no guarantee that things will develop as expected, as well as disagreement across the various forecasters about the future path of the market.”

A major change in the direction of the economy or a sudden spike in interest rates could obviously change things, he said, but at this point the balance of probabilities appears to indicate that commercial real estate returns will continue to be attractive going forward, even if at a somewhat reduced level.

Although MacKinnon said none of the results were very surprising, he did find it interesting that multi-family, which had been a great story over the past few years, is predicted to lag the other property types substantially. “On that other hand, industrial is expected to be the top returning sector in both 2015 and 2016, as well as over a five-year horizon,” he said.

Twenty-two firms participated in the survey.