Note that most institutional investors do not invest in real estate. Only large, sophisticated investors have the necessary resources to invest in the asset class. For example, in the United States, there are nearly 4,000 public pension systems (state and local), according to the U.S. Census Bureau. And, according to The Money Market Directory, there are more than 65,000 pension plans (public and corporate) in the United States. Of that group, roughly 2,000 invest in the real estate asset class.

While smaller investors stick to investing in equities and bonds, larger investors are attracted to the real estate asset class because it provides portfolio diversification — due to its low correlation to other assets — and offers an appealing income and yield opportunity. During the past few decades, these investors have slowly increased their allocations to real estate, and today the average target allocation for U.S. pension funds is approximately 9 percent.

The global institutional real estate market has been estimated at $10.2 trillion, according to LaSalle Investment Management Real Estate Universe Estimates 2020-2021 Edition. The Americas account for 35 percent of the total, or $3.7 trillion, while Asia Pacific accounts for 32 percent ($3.3 trillion), Europe represents 28 percent ($2.8 trillion) and Middle East/Africa totals 4 percent ($400 billion).

Traditionally, pension funds have viewed real estate as a relatively high income-producing asset class with equity characteristics, and underwriting has focused primarily on assessing the quality or sustainability of cash flow. During the past several years, many investors have been changing their perspectives, viewing real estate now as more of an equity asset class with better-than-average income characteristics.

As more baby boomers retire, many pension funds will have negative cash flows — they will be paying more to beneficiaries than they will be receiving in contributions from current workers. Because of this, it’s expected that pension funds will become much more income-oriented, so they will be in a better position to fund those negative cash flows without having to liquidate assets. With real estate’s inherent potential for generating relatively high cash distributions, we would expect pension funds to continue to view it as an income-producing asset with equity characteristics.

Institutional investors use a variety of investment vehicles and strategies to construct and diversify their real estate portfolios. Investments can include both equity and debt, and investors invest in both public (e.g., REITs and CMBS) and private markets (e.g., direct property investments and mortgage loans). Common investment vehicles include pooled funds, separate accounts and joint ventures. With regard to property types, institutional investors primarily focus on the core property types of office, retail, industrial and multifamily, but they also may invest in noncore or “specialty” property types such as data centers, healthcare/medical offices, hotels, life sciences, senior housing, single-family housing, student housing and self-storage.

Most investors in “core” properties (i.e., high-quality, well-located, multi-tenanted, income-producing office, industrial, multifamily and retail properties) expect to receive around 8 percent to 9 percent on their unleveraged real estate investments. If they use leverage, they tend to leverage assets between 5 percent and 60 percent, with average portfolio leverage ranging between 20 percent and 40 percent. Leveraged return expectations for core real estate investments, therefore, range between 10 percent and 15 percent.

Investors typically expect value-added investments (i.e., investments in underperforming and/or undermanaged assets that possess upside potential) to generate returns of between 12 percent and 15 percent. Investors seek properties where NOI and property value can be positively affected through a change in marketing, operating or leasing strategy; physical improvements; and/or a new capital structure.

Opportunistic investments can be described as investments in underperforming and/or undermanaged assets that hold the expectation of near-term increases in cash flow and value through “turnaround” strategies. Opportunistic investments often include development-oriented or repositioning/redevelopment strategies. These investments typically imply the assumption of more risk in exchange for a higher return. Investors expect returns in excess of 18 percent to 20 percent.

Many of the larger investors have both core and high-yield investment components within their portfolios and, therefore, have different risk/return expectations depending upon the strategy for each portion of the portfolio.

According to Global Investment Managers 2022, an annual survey/report conducted jointly by Institutional Real Estate, Inc., and U.K.-based Property Funds Research, the largest real estate investment management firms include Blackstone, Brookfield Asset Management, MetLife Investment Management, PGIM Real Estate, Nuveen Global Real Estate,  AXA IM Alts and CBRE Investment Management. The report captured data from 228 real estate investment managers around the globe, which collectively control $5.68 trillion of real estate assets.

Similar to years past, the data shows a strong concentration of assets held by the industry’s largest firms. The top 10 firms represent 32 percent of aggregate AUM.

Focusing on just the United States and Canada, some of the pension funds with the largest real estate portfolios include California Public Employees’ Retirement System, California State Teachers’ Retirement System, Washington State Investment Board, Canada Pension Plan Investment Board, Caisse de dépôt et placement du Quebec, Teacher Retirement System of Texas and New York State Teachers’ Retirement System.

IREI publishes an annual listing of the largest institutional real estate investors in North America. The 2023 report included more than 100 plan sponsors with information on their total AUM and real estate AUM.

Yes, definitely! While 10 years ago only a few tax-exempt investors had real estate investments overseas, today it is far more common. Interest in cross-border investing is increasing as institutional investors seek greater portfolio diversification and look to capitalize on the best risk-return opportunities. In addition, many large investment managers have established overseas offices and greatly enhanced their local market expertise. As investors become more comfortable with cross-border investing and gain a better understanding of the inherent risks and keys to success, cross-border capital flows should increase.

Institutional Real Estate, Inc. is an information, publishing and consulting firm that has been focused on the institutional real estate marketplace for more than 30 years. It provides a variety of resources for both industry newcomers and veterans. A few suggestions:

• Sign up to receive our FREE Institutional Real Estate Newsline publication, which provides daily email market news and insights.
• Subscribe to Institutional Real Estate Americas, IREI’s flagship magazine, which is in its 35th year of publication. Americas offers news articles and feature stories on the trends, issues and events shaping the marketplace, including articles on fundraising, transactions, investment strategy and portfolio management.
• To understand the overseas investment markets and investment opportunities, subscribe to Institutional Real Estate Europe and/or Institutional Real Estate Asia Pacific.
• Check out irei.com for the latest video and podcast interviews with industry thought leaders.
• View IREI’s Market Navigator video series. This program is a recording of our popular Market Navigator class taught by Geoffrey Dohrmann. The two-day course is broken down into 12 videos that you can watch at your convenience. The course will introduce you to the world of the institutional real estate industry. It starts by outlining the participants, roles, jargon and culture of the market. It then spends time on marketing and client service, including discussions on fundraising and relationship management.
• View IREI’s exclusive video series, Real Estate 101, presented by longtime industry investment strategist Glenn Mueller. The six-part video series is ideal for newcomers to the real estate asset class who want to gain a thorough understanding of its role in a multi-asset portfolio, as well as the basics related to property fundamentals, investment tenets, capital markets and portfolio management.
• Attend IREI’s various industry events, including Visions, Insights & Perspectives (VIP) Americas conference, the industry’s premier event for learning, sharing and networking.

Institutional Real Estate, Inc. publishes the following titles:

• Institutional Real Estate Americas
• Institutional Real Estate Europe
• Institutional Real Estate Asia Pacific
• Institutional Investing in Infrastructure
• Institutional Real Estate Newsline
• Infrastructure Newsline
• Real Assets Adviser Newsline
• iREOC Newsline
• IREI.Q Fundraising Reports
• Real Assets Adviser

In addition, IREI publishes a number of investment guides and special reports.

IREI produces a number of industry conferences, including VIP Americas, VIP Europe, VIP Infrastructure, IREI Springboard and CEO Summit.

The company also operates a subscriber-based database service called IREI.Q, which provides users with information on institutional investors, investment managers and consultants, fund offerings, and commitments.

In addition, IREI has a relatively new offering: the Institute for Real Estate Operating Companies (iREOC). iREOC, a division of Institutional Real Estate, Inc., is a membership organization that was formed to bring together and engage leading professionals from across the institutional real estate investment and built environment industries to focus on helping institutional investors, investment managers and real estate operating companies form more collaborative and effective investment partnerships through thought leadership, improved information standards, proven practices in workflow processes and education.

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