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WASHINGTON, DC-Institutional investors continue to increase real estate allocations in their portfolios after many firms sold holdings in 2002-03 to take advantage of high valuations, according to the latest Commercial Real Estate Outlook of the National Association of Realtors. The office and industrial sectors--with sale-leaseback transactions specifically targeted--appear to be in particular favor among institutional investors.
"This is telling for the commercial real estate markets because institutional investors are risk adverse," Scott MacIntosh, senior economist with NAR tells GlobeSt.com. According to NAR, institutional investors spent $27 billion on commercial real estate by midyear. In comparison, they spent $19.5 billion by midyear 2005 and $8.5 billion in the first six months of 2004.
MacIntosh also points to anecdotal evidence to make his case for the return of the institutional investor, citing the $144-billion CalSTRS' announcement last week that it was increasing all allocations for real estate and other higher return asset classes to 11% from 6%.
Institutional investors and private equity funds accounted for half of all office buildings purchased through July and one-third of all industrial real estate, according to NAR. To date this year, NAR reports institutional investors have spent more than $31 billion in all commercial sectors so far this year--a record for institutional investment in commercial-grade properties.
Institutional investment breakdown by markets tends to vary based on market and asset class. In cities like Washington, DC--a top destination for real estate investment and a highly competitive market--institutional investors account for only 40% of the sales volumes generated from office transactions in the first half of this year. In second-tier markets like Cincinnati, Sacramento and Portland, institutional investment has accounted for 73% or slightly more of office sales volumes.
The industrial sector also is earmarked for higher allocations. In Austin, institutional investors accounted for 49% of this year's industrial sales. In Washington, DC, that figure is 100% due to the fact that it doesn't have a large industrial base while Kansas City hit 35%; Nashville, 40%; and Salt Lake City, 41%.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
