Real Estate Capital Flows

Just when it seemed that the commercial real estate industry was overflowing with capital, there appears to be even more money entering the investment arena seeking increasingly conservative returns in what is viewed as a safe asset class. When measured against other investment alternatives, real estate continues to outperform its counterparts and has done so for quite some time, especially when analyzing historical returns over a five-, 10- and 20-year period.

The additional investment capital is coming from several areas, but one specific sector that has a significant impact on our industry and appears to be very bullish on real estate is the pension fund sector. We are seeing a number of trends occurring from this important industry segment. One is that pension funds that have consistently invested in real estate are increasing their allocations and using increased leverage. Funds that have not used leverage in the past are now beginning to place 20% to 25% leverage on their acquisitions. Similarly other funds appear to be moving up the leverage spectrum as well, and those that placed 20% to 25% are now placing 50%, If before it was 50%, now it’s 70%. And if before it was 70%, now it’s 80% with the utilization of mezzanine financing. In addition, several pension funds that have elected not to participate in the real estate area within their portfolio are now beginning to create allocations for real estate.