The 12th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate, has revealed that institutional target allocations to real estate are expected to decrease in 2025. This comes after two years of remaining flat at a target allocation of 10.8% in 2024. Institutions are planning to lower their targets by an average of 10 basis points (bps) next year, with a focus on other investment options such as private credit and infrastructure.
According to the survey’s “Conviction Index,” institutions are gaining confidence about the market bottoming out and see this as an opportunity to invest capital into new ventures.
Douglas Weill, Managing Partner at Hodes Weill & Associates stated that despite ongoing challenges in the market, data from commercial property price indexes suggest that real estate valuation metrics have reached their lowest point – with some even showing signs of rebounding. He also noted that declining inflation rates and increased transaction activity should help stabilize valuations. As a result, institutions who have been under-allocated thus far may start increasing their allocations once again.
Other key findings from the survey include:
– Institutions plan on lowering target allocations by an average of 10 bps over the next year.
– Since 2022, institutions have remained cautious about investing in real estate due to high interest rates,
uncertainty around pricing transparency,and low transaction volumes.
– Investors believe that while real estate is cyclical,it will likely deliver strong performance over time.
-Institutional portfolios saw negative returns (-1.4%)in2013 following ten yearsofoutperformance(10.l%)comparedtotheirtargetreturns.
-Institutions were more active investing capital into REITs last year due mainly because they offered liquidityandtheopportunitytotakeadvantageofdiscrepanciesbetweenpublicandprivatemarketvaluations
-The most favored investment strategy in 2024 was value-add, with 79% of institutions actively allocating capital to these types of investments. This was followed by opportunistic (73%) and core (62%) strategies.
Overall, the report suggests that while institutions have been under-allocated to real estate in recent years, they are starting to gain confidence and may increase their allocations as transaction volumes grow.
