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PREA Survey Forecasts Declines in Total Returns in 2018

According to the latest Consensus Forecast, the NCREIF All Property Types (NPI) Index is expected to fall by 80 basis points between 2017 and 2018, to 5.2 percent.

The third quarter Consensus Forecast survey released yesterday by the Pension Real Estate Association (PREA) shows that market participants expect total returns on the four core property types to decline slightly over the next two years. At the same time, survey participants expect income returns will stay stable or increase.

According to the latest Consensus Forecast, the NCREIF All Property Types (NPI) Index is expected to fall by 80 basis points between 2017 and 2018, to 5.2 percent. In 2019, survey participants indicated the Index, which measures total returns including income, will likely decline by another 40 basis points, to 4.8 percent. Survey participants expect the industrial sector to experience the greatest decline in total returns, falling by 400 basis points between now and 2019, to 5.7 percent. Total returns for retail are forecast to fall 120 basis points during the same period, ending up at 4.8 percent. Survey respondents anticipate that returns on multifamily properties will decline the least, going down 80 basis points from 5.6 percent in 2017 to 4.8 percent in 2019.

Over the four-year period from 2017 to 2021, however, the industrial sector is expected to show the greatest growth in returns out of the four property types tracked, with 6.5 percent.

At the same time, survey respondents forecast that income returns will move up slightly for three of the four property types. Income returns on both office and multifamily properties are expected to increase by 20 basis points over the next two years, ending up at 4.7 percent. Income returns on retail assets are forecast to go up by 10 basis points, to 4.9 percent in 2019. Income returns for industrial properties are forecast to fall by 10 basis points in 2018, but end up back at 5.3 percent the year after.

Most of the declines in total returns are expected to come from slower appreciation, according to the results of the survey, with office and industrial properties forecast to show the most drastic declines in appreciation returns over the next two years, by 170 basis points and 370 basis points respectively. By 2019, survey participants expect that office properties will be experiencing negative appreciation of 0.5 percent.

Survey participants included 25 firms representing real estate investment managers, advisors and research providers. The survey took place in August of this year.

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