The 12th annual Institutional Real Estate Allocations Monitor from Hodes Weill and Cornell’s Baker Program in Real Estate learned that institutional investors were lowering their target allocations for commercial real estate after a couple of years of poor results in portfolios.

The report also found some interesting trends in how institutions managed those portfolios. There is a growing move to take management in-house, however, the “vast majority” of institutions still depend on third-party managers.

The study covered 186 participants in 25 countries. They represented $13.6 trillion in AUM and $1.4 trillion in real estate. The sample included 30% public pensions, 26% endowments and foundations, 20% insurance companies,18% private pensions, and 6% sovereign wealth funds and GEs. Two-thirds of respondents were from the Americas, 21% came from EMEA, and 13% from Asia-Pacific. About 73% had less than $50 billion AUM; the remaining 27% had more.

About 93% of the institutions outsource at least some portion, if not all, of their portfolio management to third parties; two-thirds outsource all their portfolio management. Approximately 7% manage all their portfolio allocations in-house.

The proportions vary by institution size. About 67% of smaller institutions outsource all their portfolio management, while only 46% of larger institutions do so. The study said the split is a matter of resources on one hand, and the opportunity to reduce costs on the other.

Smaller institutions have “less infrastructure and leaner teams.” They generally don’t have enough people, tools, and support to do as much portfolio management as needed. Larger institutions do tend to have the resources, and they frequently cited cost reductions for bringing management in-house. Canadian pension fund manager, Caisse de dépôt et placement du Québec (“CDPQ”) had two subsidiaries — Ivanhoé Cambridge and Otéra Capital — for management. Earlier in 2024, they brought them in and integrated them with the existing investment and corporate services team. The pension fund manager expects to save $100 million annually.

Insurance company assets outsourced third-party managers by more than double over the last 10 years, from $1.4 trillion in 2014 to $3.5 trillion today. In 2022, 39% of insurance companies outsourced all of their portfolios. This year, 48% of insurance companies are outsourcing them fully.

In 2024, 64% of investments will have gone to existing manager relationships, 22% to new manager relationships, and 14% to in-house.

Emerging managers face challenges in attracting institutional capital. Only 13% of institutions will invest with first-time fund managers in 2024. The institutions worry about the managers' lack of track record as fiduciaries and experience with previous market cycles.