Institutions Buck 2020’s Lower CRE Returns with Plans to Allocate More

Institutional investor confidence in commercial real estate remains strong, reaching a nine-year high in 2021, according to Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate’s ninth annual Institutional Real Estate Allocations Monitor. That’s the case even as actual returns declined significantly last year, owing to a decline in property valuations resulting from vacancies, cash flow risks and uncertainty stemming from the COVID-19 pandemic.  

The “Conviction Index” in this year’s survey, measuring 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. Hodes Weill attributes this confidence 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. Also driving investor conviction is the view that there is, or will be, an opportunity to invest in certain sectors or markets that are experiencing distress or dislocation.  

Target allocations to real estate increased among survey respondents for the eighth straight year to 10.7% in 2021 – up 10 basis points from 2020. Hodes Weill says that implies the potential for an additional $80 to $120 billion of capital allocations to real estate in the coming years.  

While target allocations have seen moderate year-over-year growth for the past three years, institutions expect to increase their targets at a faster pace over the next 12 months to an average of 11%, with Asia Pacific (APAC) institutions coming in at the high end of the spectrum and North American investors at the low end.  

The percentage of institutional portfolios invested in real estate decreased from 10.0% to 9.3% in 2021, widening the gap between target and actual allocations to its largest in seven years. The 140-bp margin is meaningfully above the 60- to 110-bp range Hodes Weill and Cornell have documented since the survey was first conducted.  

Approximately 67% of institutions are under-invested relative to target allocations by an average of 230 bps, led by APAC institutions with a 290-bp margin. This, along with a substantial increase in conviction year-over-year, suggests that institutions in APAC will be very active deploying capital over the coming years. 

“Last year, institutions reported being under-invested by an average of 60 basis points, which we largely attributed to the denominator effect and the poor performance of public equities following the onset of the COVID-19 pandemic,” said Douglas Weill, managing partner at Hodes Weill. “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.”