Despite Last Year's Underperformance, CRE Institutional Investment to Quicken in 2022

While the growth in target allocations remained moderate year-over-year, institutions expect to increase allocations to commercial real estate at a faster pace over the next 12 months, according to Hodes Weill Associates’ Allocations Monitor.

Much of this is because institutional portfolios are under-allocated to real estate by the widest margin over the past seven years, resulting in an acceleration of capital flows to the sector.

Also on the plus side, investor sentiment increased to a nine-year high, and investors remain bullish about the opportunity to deploy capital.

Rate of Institutional Allocation ‘Steady’

Average target allocations increased to 10.7% in 2021, up 10 bps from 2020 and up 180 bps since the Monitor launched in 2013. The rate of increase has held steady for the third straight year and compares to an annual range of 20 bps to 40 bps between 2013 and 2018.

Institutions are expecting to increase target allocations by 30 bps over the next 12 months, to an average of 11%.

Institutions report a margin between actual and target allocations of 140 bps, up meaningfully from 60 bps in 2020 and as compared to a range of 60 bps to 110 bps since 2015. This can be attributed to a slowdown in the pace of capital deployment for several quarters in mid-2020 following the onset of the COVID-19 pandemic, and the denominator effect, as public equities are at or near all-time highs and other asset allocations, including private equity and venture, have delivered outsized returns.

Actual Returns Trail Target Returns

Portfolio investment returns under-performed long-term targets in 2020; but investors remain optimistic for 2021 as valuation metrics climb to all-time highs, according to the report. 

As property markets experienced volatility and in some cases devaluation in 2020, portfolio returns dipped to 5.9%. 

This represents the lowest reported returns over the past nine years and the first year that actual returns trailed target returns of 8.2%. Institutions are reporting a strong bounce-back in returns in 2021, as economies re-open and operating fundamentals are showing strength.

Investor sentiment increased to a nine-year high, and investors remain bullish about the opportunity to deploy capital.

Report Finds Strong ‘Conviction’

Between 2020 and 2021, Hodes Weill Associates’ “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, the highest sentiment since the survey began in 2013.

Positive investor sentiment can be attributed to strong operating fundamentals in certain sectors including industrial, multifamily and niche property sectors such as life sciences and data centers. 

“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,” the report read.