The Oregon Investment Council, which oversees the $93.3 billion Oregon Public Employees Retirement Fund, Salem, was also overweight private equity — 8 percentage points over its 20% target as of June 30, boosting its returns, said Paola Nealon, managing principal at the council's general investment consultant Meketa, at the council's Sept. 7 meeting. However, she cautioned that OPERF's returns do not reflect potential write-downs in the private markets given the quarter lag. The pension fund earned a net 6.3% return for the fiscal year ended June 30, outpacing its -0.7% benchmark. It is the highest public pension fund return Pensions & Investments has reported out of 70 plans.
Greg MacKinnon, director of research of the Pension Real Estate Association, said he wasn't surprised that real estate market participants in the most recent consensus forecast survey "are expecting something of a drop-off in performance next year."
"Multifamily and, especially, industrial, had stellar years in 2021 and continued to be strong through the first half of 2022," he said in an email. "It would be hard to repeat that performance for another year, especially given macro conditions."
With the Federal Reserve raising interest rates at a quick pace to combat inflation, the economy is in worse shape than it was at the beginning of 2022, he said.
And real estate, across all sectors, is tied to economic growth, Mr. MacKinnon said.
"So, one should expect returns to be more muted than they have been over the last 18 months," he said. On top of that, the outlook for office usage is uncertain, which is gradually being reflected in market valuations, Mr. MacKinnon said.
The result is "you get lower overall return forecast for 2023 than for this year," he said. Although he added total returns are expected to start to pick up a bit in 2024, Mr. MacKinnon noted.
Even so, the annual return for the four years ended 2026 are expected to be more than 2 percentage points below the 2022 return, PREA's survey shows.
"Real estate as well as the broader capital markets have been on quite a ride," said Scott Dennis, Dallas-based CEO of Invesco Real Estate, a division of Invesco Ltd.
The real estate industry is coming off a period where the NCREIF Open-End Diversified Core Equity index returns were running in the high 20% range, Mr. Dennis said.
"That's been great ... from a return perspective, but that is not sustainable," he said.
While the real estate investment trust market had dropped 20% right away this year, the private real estate side has not yet reflected the markdowns due to a lag in valuations, which are done by third parties, Mr. Dennis said. If the markets continue as they are with rising interest rates, there will be valuation markdowns in the third and fourth quarter of 2022, going into the first quarter of 2023, he said.