Institutional Investors Still Like the Coastal Markets, Office

The 35 major institutional real estate owners’ investment activity, as measured by properties acquired and total dollar volume, fell by 34% in 2020 compared with 2019, according to a report from Reonomy. Not only was this the most significant decline in investment in the last decade, but it put buying activity at 2014 levels.

When big money buyers did make purchases in 2020, they were mainly in line with their pre-pandemic buys. For instance, they continued to make allocations in the South and West, where they invested before COVID. Roughly 80% of properties were located in these regions at the end of the year.

This consistent approach led Reonomy to conclude that “changes to longer-term outlooks are either minor or have not yet been implemented.” Keeping with that theme, large investors continued to allocate money to major markets in 2020, showing they may not believe that work from home is here to stay long term.

Institutional investment in the top 20 markets increased both year-over-year and compared to their 10-year average allocation, according to Reonomy. Markets like Charlotte, Minneapolis, Nashville attracted more of that investment, but they remained out of the top ten of investment allocation.

“While not at the same pace in prior years, the acquisition of new properties in many of the large coastal hubs is indicative of Big Money’s views of their resiliency,” Reonomy wrote.

The 35 major institutional real estate owners are diversified across many property types. But office is their largest concentrated position. The most diversification by product type can be found in the alternative investment managers (asset managers that manage non-conventional and complex investments) and real estate-focused managers’ (real estate owners focusing on owning, managing and developing assets) peer groups. Both groups have a meaningful allocation to hospitality. Alternative Investment Managers have an above-average allocation to retail at 8%, while real estate-focused managers have an above-average allocation to industrial.

These players only invested $3.82 out of every $100 into hospitality in 2020. In 2019, they invested $8.59 in the sector. However, aggregate 2020 Big Money investment in hospitality properties was in line with the 10-year historical average dollar volume. Its investment into the hot industrial sector fell from $17.65 out of every $100 invested in the asset class in 2019 to $12.51 in 2020. Still, the aggregate 2020 Big Money investment in industrial properties remained just below the 10-year historical average dollar volume.

While investment allocations from the 35 major institutional investors fell, foreign investment is poised to increase.  Sixty percent of responding investors to AFIRE’s, the Association of Foreign Investors in Real Estate, 2021 survey expect to increase their investment volume this year.

The online survey was of 101 respondents from 19 different countries over a three-week period in March. The percentage of investors expecting to put more money into US CRE was much larger than for Europe (17%), Asia-Pacific (9%), the U.K. (7%), Canada (5%), or Australia and New Zealand (3%).