Prudential Cuts Forecast on Investment Returns

Prudential Real Estate Investors, which manages more than $20 billion worldwide, trimmed its forecast on property investment returns, citing the possibility of falling real estate values as the U.S. economy deteriorates.

The Prudential Financial Inc. real estate arm pared its forecast of gains in the NCREIF property index, a benchmark real estate index, to 7.5% to 9.5%. Prudential had estimated the index would gain as much as 11.5%.

The report is the latest evidence of a weakening U.S. real estate market. Research from Torto Wheaton showed in July that U.S. office vacancy rates have topped 10%, the highest in four years. PricewaterhouseCoopers warned this month of a sharp contraction in U.S. real estate.

“We expect there to be more pessimistic headlines out of the real estate sector before vacancy levels stabilize in the highly visible office and hotel markets,” said Bernard Winograd, Prudential Real Estate’s chief executive. Still, returns on private real estate investments will be about 8.5% this year, and there is a 50-50 chance of appraised property values falling, Prudential said.

“We do not see a dangerous degree of deterioration in underlying fundamentals,” Winograd said.

Prudential went on to say in the report that it sees the “current environment as an opportunity for medium- to long-term investors to increase exposure to real estate.”