According to the 12th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate, 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 plan to lower their real estate target allocations by an average of 10 basis points (bps) over the next year, with a focus on other investment opportunities such as private credit and infrastructure.
However, there is growing optimism among institutions about potential market bottoming and new investment opportunities. Douglas Weill, Managing Partner at Hodes Weill & Associates stated that commercial property price index data suggests that real estate valuation metrics have hit bottom or even started rebounding due to declining inflation rates and increased transaction activity.
The survey also revealed that institutions have been hesitant about investing in real estate since 2022 due to high interest rates, pricing transparency concerns, and low transaction volumes. However, they believe that despite being cyclical investments ,real estates will continue delivering strong performance over the next cycle.
Institutional portfolios saw negative returns (-1.4%)in2013 following ten years of significant outperformance (10.1%) relative totarget returns.In response,the majorityof investors were more active allocating capital towards REITs for liquidity purposesand taking advantageof discrepancies between publicand private market valuations.However,value-add was consideredthe most favored strategyin2024with79%activelyallocatingcapitalto these typesofinvestments,followedby opportunistic(73%)and core(62%).Despite this trend,institutions still remain under-allocatedto realestatebutareexpectedtostartacceleratingtheirallocationsasmarketconditionsimprove,andtransactionvolumesincreaseoverthenextyear.
