Institutional investors are the 800lb gorilla in the investment world: by virtue of their sheer size, it pays to pay attention to trends and changes in institutional investor sentiment and market beliefs. For real estate investors, this is especially important, as institutional investors continue their decade-long expansion into holding real estate and land assets.
While institutional investors such as sovereign wealth funds, pension funds, insurance firms, hedge funds, and other heavyweights have typically been associated more with publicly traded stocks and bonds since the 2008 crisis institutions have increasingly moved allocated a greater percentage of their assets to alternatives, of which real estate has been a growth asset class in the past decade.
This article explores current institutional investor sentiments about real estate investing as of 2021 and provides some key trends for investors like you to monitor. Read on to find out more about what the largest investment managers in the country foresee for the future of their investments – and yours.
Institutional Investor Sentiments in 2021
The key institutional investment narrative of the past two years has been the ongoing effects of the coronavirus pandemic. While initial fears of a market crash and second recession proved overheated, the pandemic has resulted in a considerable change to the American and global economies, and this shift is reverberated in real estate markets and among institutional investors to this day.
Before we explore the key trends among institutional investors in real estate, let’s set the playing field with a short summary of major sentiments among institutional investors in 2021.
Interest Rates
The view on rates has changed in recent months with comments from Jerome Powell, whose decision to taper bond purchases is seen as a signal the Federal Reserve’s timeline for interest rate hikes has moved forward. However, no short-term movement on rates is expected until late 2022 at the earliest, and so investors should continue to expect the current low-rate environment to predominate until that time.
Macroeconomy
As institutional investors are typically globally invested across multiple asset classes, they take a macroeconomic view towards their investment asset mix – and their sentiments about the future of real estate in the larger economy is illuminating. By now, it appears the global change in working conditions ushered in by the pandemic is here to stay, and institutional investors are adjusting their portfolios accordingly.
Office and retail exposure is down, while warehouses/logistics and exurban/rural residential are both seeing a rise due to the rise of ecommerce and on-demand delivery, and the work from home revolution in white collar and information processing roles, respectively. However, urban residential continues to be a strong area of interest for institutions, as major urban areas continue to attract highly productive workers and supply constraints continue to affect a major increase in housing prices.
Environmental, Social, and Governance
Environmental, social, and governance (ESG) concerns continue to be of growing interest to institutional investors, and this is beginning to be reflected in their real estate holdings. Coal, oil, and other carbon-intensive industries are becoming less attractive, and more capital is flowing towards not only eco-friendly and green new builds, but towards de-carbonization and greening efforts for existing building stock. ESG concerns are not yet paramount, but watch this space in 2022 for changes of note.
Key Trend: Positive Capital Flows
In 2020 capital flows from institutional investors surged into real estate and other real assets such as land and infrastructure. Per BlackRock, closed-end real estate funds raised almost $100 billion that year alone, and a survey of the 2020 rebalancing efforts of global asset managers found 55% of them intended to increase their real asset allocations in 2021 and 2021.
Institutions & Single-Family Homes
The effect of this rebalancing was seen in the second half of 2020, when two trends collided: the long-term appreciation in single-family housing in major metro areas around the globe, and the increase in asset allocation by institutional investors into real estate and land investments, including single-family housing.
To some extent these are mutually reinforcing tendencies: as SFO properties appreciate in value, they become more attractive to institutional investors, and as institutional investors invest in SFOs, they will increase the prices as a result of increased demand. While political demands for housing reform are growing nationally, at the local level calls for zoning changes and a decrease in housing prices are a dead letter, and so investors should expect continuing price growth for residential real estate nationally.
Dry Powder Still Increasing
“Dry powder” is the amount of cash investment funds are holding in reserve, waiting for the next right investment, and in 2020 the total dry powder hit a high of $540 billion. With the real return of real estate continuing to be an attractive prospect, investors should expect that institutions will further deploy more of their dry powder for real estate investments in 2022 and ongoing.
Key Trend: Build-to-Rent
One area experiencing considerable growth and rising interest among institutional investors is build-to-rent (BTR), a real estate investment business model around purpose-built rental communities. While the physical stock of these communities are single-family houses, they are run like multifamily properties, offering shared amenities (including open-air and green spaces), property management, and predictable and reduced maintenance and operations costs.
A recent report from DS News suggest that institutional investors have allocated over $10 billion to the BTR sector in recent years. John Burns Real Estate Consulting told research analysts that “Some 12% of new single-family construction in 2021 is being done for rentals” and that the nationwide supply of BTRs was expected to increase rapidly for several years.
This is due to several factors, but chief among them is the harmonious blend of some of the better features of single-family dwelling renters (tendency to stay longer than multifamily and greater community commitment) with positive features of multifamily property management, including reduced operating costs and efficiencies of scale, and greater standardization and diversification of cash flows.
Key Trend: Secondary Market for Private RE Funds
A financial market has become truly well-established when a secondary market for its securities forms, and it appears that in the past year such a market has formed for stakes in private real estate funds. The game is no longer just about investing in individual properties, but in trading real estate portfolios, knowing as secondaries trading.
Secondaries trading allows private market investors to buy and sell stakes in funds at any point in that fund’s life, rather than being forced to hold their investment until completion. The rise in secondaries trading will provide a strong increase in liquidity in the private fund market, and by allowing investors to exit and enter private real estate funds will increase the total velocity of funds in the market.
This change will be especially notable for private real estate investment trusts (REITs), which unlike their publicly-traded cousins require investors to make commitments of up to 10 years or longer for each fund. Expect further growth in this area as investors become attracted to the potential of short (1-3 year) investments in private real estate funds as part of their portfolios.
Next Steps
Knowing the trends and sentiments is part of the puzzle… but the key is to be able to recognize good deals and act decisively. And that’s where our advisors are ready to help you today.
Dunmor is ready to assist you in all your real estate lending needs. Our team of seasoned real estate professionals has deep expertise in all facets of real estate lending and investments, and we provide high-quality real estate lending resources to thousands of professional real estate investors just like you.
Contact us today to find out how we can take your real estate investing to the next level.
Sources
Afire, “Build-to-Rent Boom”. https://www.afire.org/summit/build-to-rent-boom/
BlackRock, “2021 global real assets outlook”. https://www.blackrock.com/institutions/en-us/literature/whitepaper/global-real-assets-outlook-2021.pdf
DS News, “Institutional Investment in Build-to-Rent Booming”. https://dsnews.com/daily-dose/07-28-2021/institutional-investment-in-build-to-rent-booming
Enriched Investing Incorporated, “Institutional Investors and the Real Estate Market in 2021”. https://enrichedinvesting.com/institutional-investors-and-the-real-estate-market-in-2021/
Institutional Investor, “A New Secondary Market Is Rising Out of Pandemic-Fueled Changes to Real Estate”. https://www.institutionalinvestor.com/article/b1stdv8705kmw5/A-New-Secondary-Market-Is-Rising-Out-of-Pandemic-Fueled-Changes-to-Real-Estate
Institutional Investor, “5 Reasons Real Estate Could Roar in the 2020s”. https://www.institutionalinvestor.com/article/b1sq9nsshqkpw6/5-Reasons-Real-Estate-Could-Roar-in-the-2020s
PWC, “Emerging Trends in Real Estate®: US and Canada”. https://www.pwc.com/us/en/industries/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html
