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Total US real estate returns expected to decline in 2018, survey finds

The U.S. commercial real estate market is expected to see average total returns, including income, of 6.9% across all property types in 2017, but the metric is expected to drop to 5.6% in 2018, according to the Pension Real Estate Association's fourth-quarter Consensus Forecast survey.

The association surveyed 24 of its member firms in November regarding their most recent real estate return predictions, as represented by the National Council of Real Estate Investment Fiduciaries Property Index, which measures returns to the institutional real estate market on an unlevered basis and gross of management fees.

Based on the firms' average forecast for 2017, the industrial sector will have the largest total return, at 11.7%, followed by the apartment segment, at 6.0%. The office and retail sector total returns are forecast to both reach total returns of 5.9% for the year.

In 2018, total returns are expected to decline to 7.6% for the industrial sector and to 5.3% for the apartment sector. The office and retail sectors are also forecast to decline in 2018, to 5.2% and 4.8%, respectively.

Since the first quarter of 2016, the consensus view of 2018 real estate returns has remained below 6.0% on the National Council of Real Estate Investment Fiduciaries Property Index. Compared with the third-quarter 2017 results, survey participants during the fourth quarter expected higher returns for 2018 across all property types.

During the fourth quarter, the consensus view of 2018 returns increased for the industrial, apartment and office sectors from the third-quarter consensus. The consensus view of 2018 returns for the retail sector, which faced tenant bankruptcies, store closures, job losses and other challenges this year, barely moved in the fourth quarter.