The “denominator effect,” which has forced many institutions to pause new investments, appears to be easing. Yet, institutions remain keenly focused on rebalancing existing real estate portfolios, and they are moving cautiously when it comes to deploying fresh capital.

The denominator effect moved to the forefront in 2022 following a large decline in the public equity market, resulting in many investors being overallocated to illiquid asset classes such as real estate. Rebalancing has not been easy, as queues for redemptions and a sluggish property sales market have made it difficult to generate liquidity for investors. However, as the public equity market rebounded, the imbalance within investment portfolios has moderated, and capital is now coming back into the private real estate market.

The denominator effect is still a part of the discussion when investment managers talk with investors and consultants about allocations and what the year ahead is going to look