Institutional Investors Still Like Real Estate, But Are Waiting for Better Prices

To be sure, some deals are still happening. But these tend to involve some of the biggest, capital-rich institutional subgroups—sovereign wealth funds, large pension plans, life insurers—who can afford to purchase properties directly or form joint ventures with established real estate players, rather than mid-market participants who tend to rely on funds run by outside asset managers for their real estate allocations.

For example, in early April, Safehold Inc., a publicly-traded REIT that focuses on ground leases,  announced that it entered a joint venture with an unnamed sovereign wealth fund to acquire new ground leases. The sovereign wealth fund committed to a 45% interest in the venture, for approximately $225 million.

In addition, according to data from MSCI Real Assets, in the first quarter of this year, some of the top transactions involving institutional buyers included Rexford Industrial REIT buying a 1.1-million-sq.-ft. industrial facility in Fontana, Calif. for $365 million; Brookfield Asset Management buying a 1.8-million-sq.-ft. industrial property in San Gorgonio Pass, Calif. for $329 million and Pacific Life buying a 324-unit apartment building in Washington, D.C. for $181.5 million.

In the larger picture, however, institutional investors have tended to stay on the sidelines in recent months. In the first quarter, private equity real estate investors closed 668 deals in North America, according to a new report from London-based research firm Preqin. That marked a 25.8% decline compared to the prior quarter and a 51.7% decline compared to the same period the year before. It was also half of the quarterly average for the past five years.

While they continue to look at potential deals, institutional investors are slow to move on them until the market resets prices on commercial real estate to better reflect true values, according to Nathan Florio, principal, advisory, transactions and business analytics, with consulting firm Deloitte. Some are also watching the mortgage market, with an eye to offering debt solutions if borrowers start having issues securing loans from banks. As a result, institutional investors have largely been in a “limbo” when it comes to real estate.