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Institutions Continue Under-Allocations to Real Estate in 2025
Institutional target allocations to real estate are anticipated to decrease in 2025 after remaining flat for two consecutive years. The 12th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate, reported that target allocations were 10.8% in 2024. Institutions are expecting to lower targets by an average of 10 basis points in 2025 in favor of other allocations, including private credit and infrastructure.
At the same time, the survey’s “Conviction Index” said that institutions are gaining conviction about a market bottom and an opportunity to allocate capital to new investments.
“Despite persistent challenges in the market, commercial property price index data suggest that real estate valuation metrics have bottomed – and in some cases, they’re showing signs of rebounding,” Douglas Weill Hodes Weill & Associates Managing Partner said in a release announcing the report.
He explained that declining inflation and increased transaction activity should help stabilize valuations. “These observations are reflected in the optimism we’ve noted among institutions, who, despite being under-allocated, have largely been waiting for a market bottom before making additional capital allocation decisions,” he added. “As transaction volumes grow, we expect to see allocations start to accelerate in response.”
Other details offered by the survey include the following:
- Institutions plan to lower target allocations by an average of 10 basis points (bps) over the next 12 months. The target allocations will include private credit and infrastructure.
- Since 2022, institutions have remained off the sidelines of real estate investments due to high interest rates, questionable pricing transparency, and low transaction volumes. This has led to a “wait-and-see” approach.
- Investors believe real estate is cyclical and will likely deliver strong performance over the next cycle.
- Institutional real estate portfolios delivered negative returns in 2023 (-1.4%), following 10 years of substantial outperformance (10.1%) relative to target returns.
- Institutions were more active in allocating capital to REITs in 2023 due to liquidity and the opportunity to capitalize on discrepancies between public and private market valuations.
- Value-add was considered a most favored strategy in 2024, with 79% of institutions reporting actively allocating capital to value-add investments. This was followed by opportunistic investments (73%) and core investments (62%).
- ◦Sale/Acquisition
- ◦Financing
- ◦Economy
