Amidst the backdrop of a tumultuous economy, rising interest rates and frozen transaction markets, institutional target allocations to real estate have remained flat for the first time in 10 years, at 10.8 percent, finds the 11th annual Institutional Real Estate Allocations Monitor, published by Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate. Institutions have chosen to spend 2023 focused on managing their existing portfolios in an environment in which investors are waiting for valuations to find a bottom. While the survey finds that institutions expect to hold target allocations steady in 2024, investors believe the next few years will prove to be good vintage years to capitalize on expected dislocation and distress.

The majority of institutions are at or over target allocations to real estate, with nearly 40 percent of survey respondents reporting overallocation to the asset class by an average of 200 basis points, in comparison with 32 percent of institutions in 2022 by an equal margin. However, while the denominator effect has been in play since early 2022, there are signs it is beginning to abate, bringing portfolios back into balance. This can be attributed to a rebound in public equities from a low in September 2022 combined with write-downs of private real estate portfolios. The survey notes there are early signs that institutional portfolios have been trending toward allocation targets over the past several quarters, with institutions responding to the survey after Sept. 1 reporting being under allocated by an average of 70 basis points.

In 2022, institutions saw real estate portfolio returns moderate to 9.5 percent, following exceptionally strong performance in 2021 when institutions reported the highest returns generated during the past decade, at 17.1 percent. This return is consistent with historical averages and is 100 basis points above institutions’ average target return of 8.5 percent. Survey respondents expect further declines, and potentially negative returns, in 2023 as portfolios continue to take write-downs.

“While target allocations are flat year-over-year, this follows 10 years of increases totaling 190 basis points, which represents an increase of over 20 percent,” said Douglas Weill, managing partner at Hodes Weill & Associates. “Moreover, the industry has consistently outperformed relative to target returns over the long-term. Despite short- to medium-term macroeconomic disruption, investor conviction in the asset class remains near its high.”

Download the full report here.

Andrea Zander is editor of Institutional Real Estate Americas.