Investors Remain Optimistic About Real Estate

Real estate advisory firm Hodes Weill & Assocs., New York, said investors remain optimistic about real estate despite an expected near-term slowdown in investment activity.

“There is uncertainty as to how the pandemic will impact commercial real estate over the medium- to long-term, but what remains clear is that the asset class represents a large and growing part of global institutions’ investment strategies,” said Hodes Weill Partner Susan Swanezy. “While caution over the short-term is likely to result in decreased investment activity, we expect to see an uptick as lockdowns and travel restrictions begin to lift and impacts to asset valuations and market fundamentals become more clear.”

Hodes Weill found investors are taking a “measured, cautious” approach to new investments and focusing on managing their portfolios at the moment. Nearly 60 percent of investors said they anticipate slowing investment activity over the next six to 12 months, but they expect impacts will start dissipating by mid-2021.

Many investors are beginning to focus on allocating capital to take advantage of anticipated distress and the evolving demand for real estate over the coming years. “Overall, investors are demonstrating continued commitment to the asset class, and the majority of investors remain under-allocated to real estate,” the report said.

Preqin, London, reported fund managers have well over $300 billion in dry powder allocated to real estate funds.

Swanezy said it may take some time for distress to appear, “but well-capitalized funds will be positioned to take advantage,” she said.

Coronavirus-related lockdowns and travel restrictions are hindering investors’ ability to conduct due diligence on new strategies and relationships, Hodes Weill said. Nearly half the institutions surveyed said they will prioritize relationships with existing managers over the near-term rather than investing with new managers, and 18 percent called themselves on hold when it comes to establishing new manager relationships. One Americas-based public pension fund said it has “hit the pause button” regarding new manager relationships, citing the need to better understand what the post-pandemic landscape will look like.

Looking across property sectors, institutions said they are prioritizing investments in logistics, data centers and multifamily given the underlying fundamentals supporting these asset classes, which have strong macro-demand drivers and have been positively impacted by behavioral shifts related to the COVID-19 crisis. The report called investor sentiment office properties unclear as shifts in demand following the pandemic remain uncertain. “Not surprisingly, investors are very cautious about the retail and hospitality sectors, which have been hardest hit by COVID-19,” Hodes Weill said.

The report noted the “denominator effect,” which some predicted would slow deployment of new capital to commercial real estate, has yet to affect allocations and said it may be less of a factor due to portfolio write-downs and the recent stock market rebound. “Moreover, institutions remain cautiously optimistic about the performance of real estate over the next 12 months as compared to other asset classes,” Hodes Weill said. “One sovereign wealth fund noted that prior to recently writing down its portfolio, it was over-allocated. However, after marking its assets to market, they are currently under-allocated.”