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“The market has continued to surprise to the upside”
A good investment
Unleveraged returns for investors, including both income and appreciation, topped 10 percent per year from 2010 through 2013, according to the NPI. That’s significantly higher than the 9.1 percent average annual return for the NPI stretching back to 1978.
The latest forecasts, on average, show commercial real estate investors earning a 10.8 percent return in 2014, as recorded on the NPI. Throughout 2014, cap rates have continued to fall lower as buyers bid prices higher. Fundamentals have also continued to improve, along with the broader U.S. economy. “That has conspired to create good returns for investors,” says MacKinnon.
By 2016, forecasters now expect the NPI return to drop to 8.0 percent, including both appreciation and income from properties.
Price appreciation is widely expected to slow down. “I don’t think anyone is anticipating further cap rate compression,” says Greg. Appreciation is expected to have contributed 5.3 percent to returns in 2014. By 2016, appreciation’s contribution to returns is expected to slow to 2.6 percent, according to the survey.
Property income is expected to hold steady in the coming years. Income is expected to have contributed 5.4 percent to returns in 2014. Two years later, in 2016, income’s
contribution to remain the same at 5.4 percent, according to the survey.
Some properties have more potential upside than others, according to the forecasters.
“The consensus is that industry is going to lead the pack,” says Greg. The growth of online retail is good for industrial properties, as retailers need industrial space for new distribution centers.
Investment returns for apartments investments are expected to lag behind other property types, largely because the sky-high cost of apartment properties leaves little room for more appreciation, even though the outlook for demand for apartments remains relatively healthy, says MacKinnon.