While there have been many opinions, forecasts, and viewpoints about how different real estate asset classes will perform coming out of the pandemic, sometimes it’s best to see where the money has already been flowing. Reonomy conducted an insightful report on where and how 35 of the largest institutional investors are allocating their funds.
The 35 investors pooled
Reonomy referred to the group of 35 investors as "big money." The institutions included in the report came from five major categories:
- Real estate-focused managers
- Alternative investment managers
- Bank affiliates
- Insurer affiliates
- Residential specialists
Although the portfolio construction varies within each category, all members of the group had at least $1 billion of U.S. commercial property owned at year-end 2020. In sum, the group of 35 has over 19,000 combined properties, a total portfolio value of over $425 billion, and roughly 2.6 billion square feet of commercial property across different property types. While some of the members from the group are publicly traded, most are privately held.
The key takeaways from the report
Investment activity was down 34% from 2019 to 2020 across the board, which comes as no surprise. That’s the most significant decline in the last 10 years.
The group of 35 likes lower-cost-of-living cities. Markets like Charlotte, Minneapolis, and Nashville saw a greater allocation of investment dollars as a percentage of total investment dollars.
While major markets like Washington, D.C.; San Francisco; Miami; Dallas; and Houston took a hit from an investment perspective in 2020, this was not the case for major cities as a whole. This would indicate that these funds may believe that the projected major exodus out of urban cities could be overhyped. The report says that cities like Boston, Atlanta, and others remained relatively strong from an investment perspective.
While the hotel industry had a tough year from an operating perspective, it also drew few investment dollars in 2020. On average last year, the group invested only $3.82 out of every $100 into hospitality, which is down from $8.59 invested in 2019. Interesting to note though is that investment in 2020 is right in line with the 10-year historical investment allocation of $3.60.
Industrial has been hot across the board, but the report notes that the group of 35 has been selective in this asset class. The group invested $17.65 of every $100 in 2019 but only $12.51 this last year. The 2020 figure is actually right in line with 10-year historical averages. The report notes that while prices have increased across the assets class, it likely hasn’t been driven by large institutional investors who have been more selective over the last year.
Dollars flowed into multifamily. The group allocated $27.42 of every $100 of new investment into multifamily in 2020, up from historical averages in the $22 range. The report notes that this is likely driven by cheap financing provided by government-sponsored enterprises (GSEs). It’s also noted that affordable housing has become more of a focus for investors, as we saw a 12% decline in average price per square foot for multifamily in 2020.
The group of institutional investors is expecting a return to the office, and investment dollars followed accordingly. Roughly 42% of investment in 2020 went into the office vertical. Historically, that number has been in the 34% range. The group bought 37.2 million square feet of office space last year, which is only 4% less than 2019. Meanwhile, they paid 12% more per square foot on average.