The 12th annual Institutional Real Estate Allocations Monitor from Hodes Weill and Cornell’s Baker Program in Real Estate has some bad overall news. In the coming 12 months, institutional investors will lower target allocations by an average of 10%.

The study of 186 participants in 25 countries representing $13.6 trillion in AUM and $1.4 trillion in real estate includes 30% public pensions, 26% endowments and foundations, 20% insurance companies,18% private pensions, and 6% sovereign wealth funds and GEs. Two-thirds of the respondents were from North and South America, while 21% came from Europe, the Middle East, and Africa, and 13% from Asia-Pacific. In terms of size, 73% had less than $50 billion AUM and the remaining 27% had more.

Real estate has been an important part of institutional investment globally. In 2022, target allocations reached a ten-year high of 10.8%, according to the 2022 version of the report. Allocations then remained at that level through 2023 — the first time in the history of the survey that target allocations didn’t increase — and in 2024 the same followed.

In 2023, the majority of survey respondents said their institutions were at or over target allocations. Nearly 40% reported overallocation by 200 basis points. In 2022, that was true for 32%. However, institutions reporting after September 1, 2023, were under-allocated on average by 70 basis points.

The reason for the shifts is a difference in performance, according to the report. Starting in 2023, institutional CRE portfolios started experiencing negative returns after 10 years of outperformance compared to target returns. Now, in 2024, public equities and other assets had strong performance while the institutions kept writing down real estate. Institutions swung their CRE portfolios to 60 basis points under-allocated. About 27% of institutions have remained over-allocated to real estate; however, that is down from 39% last year.

Although conviction is moderately positive, it is down slightly year-over-year. This may be due to falling targets and historical returns. In 2020, a difficult year, the actual return across all institutions was 5.9%, down from 2019’s 8.5%. Then, 2021 brought in a 17.1% return, an enormous jump. The following year, actual returns were 9.5%, which is still impressive. But then, 2023 saw a drop to -1.4%. Across North and South America, the return was -2.3%. The target for 2024 is 8.6%. Whether that is realistic or not won’t be obvious until after the close of the year, but the previous moves might leave investment managers skeptical.

Something that could boost positive returns, the report said, was ongoing interest rate cuts across the globe. Whether that continues or not will be seen.