Investors Increase Commercial Real Estate Allocations

Despite decreased returns in 2020, institutional investor confidence in commercial real estate remains strong, according to Hodes Weill & Assocs. and Cornell University’s Baker Program in Real Estate.

Institutional investor confidence in CRE reached a nine-year high this year, the Institutional Real Estate Allocations Monitor report said. “Pensions, sovereign wealth funds, insurance companies and other institutions continue to look to real estate as an important portfolio diversifier, hedge against inflation and source of stable income,” the report said.

Actual returns declined significantly last year, falling to 5.9 percent in 2020 from 8.5 percent in 2019 driven by lower property valuations resulting from vacancies, cash flow risks and uncertainty related to the COVID-19 pandemic. “However, the vast majority of institutions are viewing this decline as an episodic event and remain optimistic for 2021, as valuation metrics climb to all-time highs,” the report said.

Douglas Weill, Managing Partner at Hodes Weill & Associates, noted institutions reported being “under-invested” by an average of 60 basis points last year, “which we largely attributed to the denominator effect and the poor performance of public equities following the onset of the COVID-19 pandemic,” he said. “With public markets reaching all-time highs, we believe the denominator effect to be at play once again this year, with record-breaking performance widening the gap between actual and target allocations. However, as markets continue to stabilize and people are able to return to work and travel more, we have seen the pace of deployment into real estate accelerate – especially considering that confidence in the asset class continues to climb.”

The report’s “Conviction Index,” which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.9 to 6.5–its highest point since the survey launched in 2013.

“This growing confidence can be attributed to strong fundamentals in industrial, multifamily and niche property sectors such as life sciences and data centers, which are strategies that continue to attract significant capital,” the report said. “The view that there is, or will be, an opportunity to invest in certain sectors or markets that are experiencing distress or dislocation is also driving investor conviction.”