Institutional investors are sitting on the sidelines of the commercial real estate investment market, but they are not backing away from the asset class entirely. Instead, they are waiting for the investment sales climate to become less volatile and for asset prices to fall, creating opportunities for better yields, according to industry observers. Many are also biding their time until the tightening lending environment creates situations where they can take advantage of distress.
The slowdown in activity was already starting to become evident last year, before troubles in the regional bank sector created additional caution about risks associated with investing in commercial real estate. At the time, institutional investors were struggling with both the denominator effect—when the value of real estate in their portfolios relative to stocks and bonds made them over-allocated to the sector—and concerns about rising interest rates and the possibility of a recession, according to exclusive WMRE research conducted in the third quarter of 2022. Sixty-six percent of the investors surveyed by WMRE indicated lack of quality deals as the biggest hurdle to meeting their investment goals, and 39% cited the amount of time required to find such deals.
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