Institutional Investors’ Changing Expectations for Real Estate (2024)

“We undertook the global institutional investor survey to gain insights that can help CRE owners and operators as they redesign traditional CRE business models and the use of built space in response to the rapid evolution of technology and consumer preferences,” says Robert T. O’Brien, vice chairman and partner, Deloitte & Touche LLP, and Deloitte Global Real Estate leader.

The global CRE investor survey, conducted by the Deloitte Center for Financial Services, revealed the following key themes:

• A large proportion of respondents plan to increase their capital commitment to CRE, with the United States, Germany, and Canada leading the way.
• Nontraditional assets such as mixed-use properties and new business models such as properties with flexible leases and spaces are expected to attract an increased allocation of investment dollars.

• Many surveyed investors expect to prioritize their investments in existing and potential investee companies that respond rapidly to changes in business models and adopt different technologies to make buildings future ready.
• Survey respondents see a significant impact from technology advancements in legacy properties infewer than three years.

Changing Expectations of CRE Institutional Investors: Five Key Areas

“The good news for CRE owners and operators is that our survey revealed that 97 percent of the respondents plan to increase their capital commitment to CRE over the next 18 months,” observes Surabhi Kejriwal, real estate research leader, Deloitte Services LP. “Equally important to CRE players is the survey’s finding that investors are likely to diversify their portfolios through higher investments in newer and emerging business models and thematic investments,” she adds.

The analysis of investor preferences revealed by the survey produced the following considerations and strategic insights for CRE players in the areas of global capital flows, technology, cyber risk, talent, and proptechs:

1. Global capital flows:Global CRE investments continue to rise on the back of steady economic and employment growth in key global markets, despite some macroeconomic and other external concerns, including a flattening yield curve, various country tax reform initiatives, trade tariffs, and the potential impact of Brexit in Europe.

Respondents from the United States said they plan to increase their capital commitments by 13 percent over the next 18 months, while those in Germany (13 percent) and Canada (12 percent) show similar levels of interest. In terms of inbound capital, the U.S. is the most preferred CRE market globally, followed by Hong Kong and China.

With regard to the increasing appeal of new business models, more than half of the respondents said they aim to invest or increase investments in properties with flexible leases, and 44 percent plan to do so for flexible spaces.

Survey respondents specializing in mixed-use and nontraditional properties plan to increase their capital commitment by a higher percentage than those focused on traditional properties.

Takeaway: CRE owners/operators should reassess property and tenant mix to attract more capital. CRE companies should consider rebalancing their property portfolios, focusing on creating memorable tenant experiences, and diversifying their investor base to attract higher capital investment.

2. Technology:Technology has permeated every aspect of the CRE business. Nearly 53 percent of respondents believe that technology advancements will have the greatest impact on legacy properties within the next three years, and 15 percent believe that the impact is already visible.

Investors also have certain expectations about technology usage in their CRE investee companies. More than 80 percent of the survey sample said CRE companies should prioritize the use of predictive analytics and business intelligence across different business areas.

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One of the challenges facing CRE companies is the ability to prioritize investments among different technologies and needs. “Often, CRE technology leaders tend to spend significant time and resources managing both modern and legacy infrastructure while not reimagining the power of fully utilizing data,” observes Kejriwal.

Takeaway: It is imperative that CRE companies upgrade their digital strategy and infrastructure, and enhance data-gathering and analytics capabilities.

3. Cyber risk management:Technology advancements and evolving business complexities have resulted in increased information security and data privacy concerns. These risks will likely rise, as CRE stakeholders expect companies to increase technology usage. Only a quarter of survey respondents say they are very satisfied with CRE companies’ current efforts.

The growing use of IoT technologies such as wearables and sensor-enabled building management systems could broaden the attack surface of hackers, increasing access to sensitive data that can cause financial and reputational damage. It is also worth noting that attacks are no longer limited to data theft, but also to buildings' efficiency and output, as well as, in rare cases, life itself.

Many CRE companies, however, seem to be struggling to find the right balance of investments and efforts to handle such cyberattacks. They also have to prove to investors that they are adequately equipped to manage cyberattacks. Only one-quarter of survey respondents are very satisfied with companies' current efforts.

Takeaway: CRE companies should shift from reactive to proactive risk management.

4. Talent:New talent needs are emerging and should become a business priority as workplaces and work itself become increasingly digitized. Institutional investors agree: Nearly nine in 10 retail-property-focused investors and nearly seven in 10 industrial-property-focused investors somewhat or strongly agree that CRE companies need to do more to nurture their talent.

The industry seems unprepared to recruit, engage, and retain a younger talent pool: Ninety-three percent of investors from pension funds and 95 percent of those from hedge funds believe so. Yet, many CRE companies continue to face a scarcity of skilled talent. Most CRE companies also appear unprepared to deal with the high proportion of baby boomers likely to retire over the next three to five years.

Takeaway: CRE companies should double down on their efforts to prepare for a digitized workforce and work environment.

5. Proptechs:Companies focused on using technology to disrupt and innovate the real estate space are increasingly popular with investors and are expanding their coverage across the real estate value chain. Globally, almost nine in 10 of those surveyed said that proptechs will have a moderate to significant influence on the CRE industry.

There is merit in CRE companies becoming knowledgeable about proptechs, as these firms are using technology to nurture new, innovative ideas that enhance operational efficiency, tenant experience, and information flow. Yet, so far, there has been limited engagement of CRE owners with proptechs.

Takeaway: Given high investor enthusiasm, CRE companies should look at different approaches to engage with proptechs to gain a competitive edge.

Proactive Adaptability Is Key to Future Success

“Our survey found that institutional CRE investors’ mandate is leaning toward technology-enabled companies that emphasize tenant and employee experience, and newer real estate assets and business models,” observesJim Berry, vice chairman and partner, Deloitte & Touche LLP, and Deloitte’s U.S. Real Estate leader. “Their investment mandate aligns with our analyses of the technology influence on the CRE ecosystem over the last four years, namely that CRE companies will have to find ways to realign their business priorities and adapt to the new demands of their stakeholders to remain relevant,” he says.

To enhance agility, CRE companies should innovate continuously and improve organizational fluidity, rather than work within set guidelines and in silos. Running pilots of new products and services with a ‘fail early, fail fast, learn faster’ approach could allow them to learn from failures, develop better offerings, and/or discard the unviable ones. “Bottom line,” adds Berry, “CRE companies that proactively adapt to the forces of change are likely to cash in on investment dollars, tenants, and top talent, but that will require companies to be innovative, collaborative, and agile.”