Institutional Investors Plan to Decrease CRE Commitments

Institutional investors plan to reduce their new capital commitments to real estate by 19 percent this year, reported Institutional Real Estate Inc., San Ramon, Calif. and Kingsley Associates, San Francisco. 

IREI and Kingsley Associates’ annual investor survey said U.S. pension funds, endowments and foundation investors maintain a “positive” outlook for real estate but plan to commit just $62 billion of new capital to real estate this year, down significantly from 2016.

The decline in new capital flows can be largely attributed to two primary factors, said Kingsley Associates Principal Jim Woidat. “Survey respondents reported real estate holdings exceeding their target allocations to real estate, which reduces the need for new capital commitments.” He also noted that investors reported a “significant” uncalled capital overhang of $47 billion, which limits their need to deploy new capital.

While average new capital commitments to real estate will likely decline compared to last year, the vast majority of institutional investors–72 percent–still plan new commitments to real estate, the report said. Survey respondents ranked industrial assets as the most attractive property type for new investments, followed by multifamily assets.

Law firm Akerman LLP, Miami, recently reported that commercial real estate lenders and investors have grown more confident since November’s presidential election–53 percent ofthose surveyed expressed more optimism about the outlook for commercial real estate  compared to only 38 percent who expressed more optimism one year ago.

“Real estate investors have enjoyed healthy returns post-global financial crisis, but it’s evident from the survey that they are showing more caution at this point in the cycle,” said IREI President and CEO Geoffrey Dohrmann. “U.S. investors dialed back their total return expectations for real estate from 8.7 percent last year to 7.4 percent for this year. However, on a risk-adjusted basis, respondents ranked real estate as the most attractive asset class for the seventh consecutive year.”

Dohrmann said the survey found that core properties and value-add properties will receive most new real estate investment capital, 33 percent and 27 percent, respectively. 

U.S. investors plan to allocate 20 percent of capital to opportunistic investments and 8 percent to debt products, IREI/Kingsley Associates said. The report said foreign investments are targeted for 7 percent of capital and 5 percent was earmarked for real estate securities.