Institutional Investors Are Still Net Buyers

The pandemic has undoubtedly slowed commercial real estate investment sales activity, but one investment group is standing apart from the rest. During the second and third quarters, institutional investors have remained net buyers, despite the uncertainty brought on by the pandemic. In fact, according to data from Real Capital Analytics, institutional investors have acquired $9.6 billion more in assets than they have sold—and they have continued to grow their portfolios.

Institutional buying patterns are divergent from the remainder of the market. During the same time period, overall investment sales volumes fell to 2012 levels. Private investors, owner-user buyers and REITs have all been net sellers during this time period. While REITs generally have more tolerance to hold assets as values dip, private investors and owner-users have more limited access to capital than institutions. That could be one reason for the discrepancy between the investment classes, RCA concludes.

However, some private investors are actually ramping up buying activity. While the overall buying trend is down, a recent report from JLL Trends & Insights, new private investors entering the market for the first time are attracted to the low competition and interest rates. These buyers are particularly interested in real estate assets of scale, according to the article. This group has been an important source of liquidity.

Cross-border investors were the only other investment class to remain a net seller during the pandemic. This group acquired $1.8 billion in assets more than it sold. It wasn’t unusual to see this correlation. Many cross-border investors include institutional capital sources, typically pension and sovereign wealth funds and insurance companies.

While institutions have been able to hold onto assets through this period of uncertainty, the tide may be changing. Distressed deals are beginning to impact volume, and institutions may be forced to sell. One example is the Starwood Capital-owned mall portfolio. A joint venture between Pacific Retail Capital Partners and Golden East Investors is set to buy the portfolio, and according to Real Capital Analytics, the price is likely to be a severe discount from the $1.6 billion Starwood Capital paid for the portfolio in 2013.

While many investors are continuing to look for opportunities during the pandemic, there is a growing price disparity between buyers and sellers. During the third quarter, the gap widened, and it has hampered sales activity. A recent survey from CBRE found that 61% of buyers expected discounts from pre-pandemic prices, and just 9% of sellers were willing to offer such price breaks. Buyers are also putting more importance on the credit quality of tenants and occupancy rates than prior to the pandemic.