Institutional Investors Upbeat About CRE, but Cut Commitments Anyway

A report based on the latest survey by Institutional Real Estate Inc. and Kingsley Associates indicates that U.S. players plan to commit $62 billion in commercial real estate this year.
Jim Costello, RCA
Jim Costello, RCA

U.S. institutional investors plan to reduce their new capital commitments to real estate by an average of 19 percent in 2017, it was announced Monday with the release of the 2017 Institutional Investors Real Estate Trends report. On the other side of the coin, the report, which is based on the latest annual investor survey by Institutional Real Estate Inc. and Kingsley Associates, indicates that U.S. players do plan to commit $62 billion of new capital to CRE this year.

While average new capital commitments to real estate are expected to decline compared to 2016, the survey states that fully 72 percent plan to be active with new commitments to real estate this year. The survey’s participants ranked industrial assets as the most attractive property type for new investments, followed by multifamily.

The decline in new capital flows can be attributed mostly to two factors, Kingsley Associates Principal Jim Woidat said in a prepared statement. “U.S. survey respondents reported real estate holdings exceeding their target allocations to real estate, which reduces the need for new capital commitments. In addition, investors report a significant uncalled capital overhang of $47 billion, which also limits the need for new capital deployment.”

“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,” added Geoffrey Dohrmann, president & CEO of IREI. “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.”

The survey also indicated that U.S. core and value-added properties would receive the majority of new real estate investment capital, at 33 percent and 27 percent, respectively. U.S. investors reportedly also plan to allocate 20 percent of capital to opportunistic investments, and 8 percent of capital to debt products. Foreign investments are targeted for 7 percent of the capital, and 5 percent was earmarked for real estate securities.

“This notion that investors have an overhang of uncalled capital fits with what we are seeing in the transaction market,” Jim Costello, senior vice president at Real Capital Analytics, told Commercial Property Executive. “Deal volume for commercial property transactions is falling at double-digit rates on a year-over-year basis. At the same time, prices are largely holding steady.“

“To me, this disconnect … says that buyers are a little resistant to the high prices at the moment, but at the same time, sellers are not motivated to sell assets, so we get a hung market.”

“That breakdown of core, value-add and opportunistic investment fits with what we have been seeing with the actual deployment of capital in that market under $100 million, where the trends do not get distorted by big one-off deals,” Costello explained.

“The more interesting question is, Where will they be able to deploy that 33 percent of their capital to actually find core deals? For some where the lot-sizes make sense, I think we will continue to see more activity in the secondary markets where going-in cap rates are a little higher,” he concluded.

This is the 21st year IREI and Kingsley have jointly conducted this survey. This year’s study reportedly elicited record participation, with 164 responses, comprising 113 U.S. and 51 foreign investors representing $7.9 trillion in total assets and $741 billion in real estate assets.