This year has brought a new wave of cautious optimism. Capital costs have reduced somewhat, and capital availability has improved. Institutional investors, however, are in a bit of a holding pattern. Many of them have capital tied up in existing investments, and those investments haven't hit their horizon yet due to changes in market fundamentals.
John Baczewski, CRE, global chair of The Counselors of Real Estate, says that this is one of the major factors derailing investment activity. He notes that investors also need to adjust to new market norms, including higher capital costs and high single-digit returns on core assets. Investors that can adapt will find more opportunities to make deals work this year.
Transaction Velocity Needs Momentum
Institutional investors have gotten used to the investment pattern that has emerged over the last decade: commercial real estate investments exceeded double-digit return projections frequently. That dynamic isn't happening today. Instead, investors are seeing it take longer for investments to hit return targets, and as a result, capital is tied up in those investments.
"Investors will develop pacing plans under the assumption that they're going to get their capital returned somewhere near the projected timing," explains Baczewski. "Investors are waiting, and they can't keep up with their pacing plans. Investors are saying very clearly that they can't provide capital for a new round of opportunities until they start to see some capital flow back. It's an important part of their operational thesis."
According to Baczewski, this is a common theme in his conversations with institutional investors—but the good news is that there is investor appetite to move things forward. "They have asset allocation targets to meet and maintain," explains Baczewski. "The notion that they're going to leave the marketplace and simply go away would be a false notion."
If transaction activity can begin to gain momentum, it could unleash a domino effect for the wider market. "The more we can get some sales velocity going, the better it will be for everyone," adds Baczewski.
Adapting to New Fundamentals
Many investors are waiting for the previous capital cycle to return, but Baczewski says that it is time for investors to adapt to the new normal. Part of that is an educational challenge, particularly for commercial real estate professionals in their mid-career who entered the industry post-GFC. Those professionals are going to have a much different market perspective than more senior professionals who have seen similar cycles in the past.
"Investors have been living in a world where return profiles have been several 100-basis-points above average for core assets," says Baczewski. "Going forward as an industry, we should probably expect high single-digit returns from the average core real estate asset."
Adapting to this new market perspective is critical. Investors may see a 6% to 8% interest rate and think that they can't make it work. "Of course, that deal can work," according to Baczewski, "but you have to change the pricing." To adjust, investors need to find the new normal or the new line and build an investment thesis from that starting point.
Investors need a jump start to get things moving. Those who can build momentum and adapt to the new market fundamentals will see more opportunities to transact in 2026.
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