According to real estate advisory firm Hodes Weill & Associates, that has an office in Denver, investors are taking a measured, cautious approach to new investments and focusing on portfolio management. Results from a recent study showed that while 59 percent of investors anticipate a slowdown in investment activity over the next six to 12 months, with impacts dissipating by mid-2021, many are beginning to focus on allocating capital to take advantage of anticipated distress and the evolving demand for real estate over the coming years. Overall, investors are demonstrating continued commitment to the asset class, and the majority of investors remain under-allocated to real estate.
“There is uncertainty as to how the pandemic will impact commercial real estate over the medium-to long-term, but what remains clear is that the asset class represents a large and growing part of global institutions’ investment strategies,” said Susan Swanezy, partner at Hodes Weill. “While caution over the short-term is likely to result in decreased investment activity, we expect to see an uptick as lockdowns and travel restrictions begin to lift and impacts to asset valuations and market fundamentals become more clear. It may take time for distress to appear, but well-capitalized funds will be positioned to take advantage.”
While managers have approximately $328 billion in dry powder allocated to real estate funds, according to Preqin, Hodes Weill found that many investors are focused on increasing their vintage exposure over the next several years. The unique challenges associated with lockdowns and travel restrictions have hindered the ability of investors to conduct due diligence on new strategies and relationships, with 46 percent of institutions reporting that they will prioritize re-ups with existing managers over the near-term. The results indicate that only 17 percent of respondents are willing to consider investing with new managers, and 18 percent are on hold when it comes to establishing new manager relationships. Summarizing this sentiment, one Americas-based public pension fund said that it has “hit the pause button” with respect to new manager relationships, citing the need to better understand what the “new normal” looks like.
As it relates to investment activity, numerous institutions took advantage of pricing dislocation in April and May, allocating capital to public equity and debt securities. In examining the current investment posture, Hodes Weill confirmed that 59 percent of institutions intend to play a mixture of offense and defense going forward, favoring distressed and high-beta strategies with less interest in core. However, most are looking for clarity on asset valuations and impacts to fundamentals before aggressively pursuing distressed opportunities. While some institutions are actively investing in distressed strategies, others are more cautious and believe that true distress will take time to emerge.
Looking across property sectors, institutions are prioritizing investments in logistics, data centers and multifamily given the underlying fundamentals supporting these asset classes, which have strong macro-demand drivers and have been positively impacted by behavioral shifts related to the COVID-19 crisis. Investor sentiment is not yet clear on office properties, as shifts in demand following the pandemic remain uncertain. Not surprisingly, investors are very cautious about the retail and hospitality sectors, which have been hardest hit by COVID-19.
Hodes Weill noted that the denominator effect, which some predicted would slow deployment of new capital to the asset class, has yet to impact allocations and may be less of a factor due to portfolio write-downs and the recent rebound in public equities. Moreover, institutions remain cautiously optimistic about the performance of real estate over the next 12 months as compared to other asset classes. One sovereign wealth fund noted that prior to recently writing down its portfolio, it was over-allocated. However, after marking its assets to market, they are currently under-allocated.