Blueprint: Hodes Weill’s allocations monitor, Brookfield closes 2022’s largest fund, CalPERS’ real estate spending spree

Hodes Weill and Cornell University's annual Allocations Monitor white paper reveals stark overallocations among institutional investors; Brookfield's $17 billion mega-fund stands to be the biggest private real estate vehicle closed this year. Undeterred by current market conditions, US pension CalPERS deploys almost $5bn in Q3 alone; and more in today's briefing, exclusively for our valued subscribers.

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They said it

“The big difference is that whatever we touched in the past turned almost to gold. Now, whatever we touch will turn maybe into bronze at best. To find gold we will have to dig deeper”

Nathalie Palladitcheff, chief executive officer at Ivanhoé Cambridge, the real estate business of Caisse de dépôt et placement du Québec, explains to PERE that broad sector betting must be replaced by more selective approaches in order to deploy capital sensibly in the current market

What’s new?

Triple threat: Doug Weill’s placement agent and advisory firm Hodes Weill & Associates found three times as many investors are overallocated to real estate this year than last

 

Allocations akimbo
You can count on a sharp downturn to play haphazardly with institutional allocations. So it proved again, according to the latest Allocations Monitor, jointly published research by capital advisory firm Hodes Weill & Associates and Cornell University’s Baker Program in Real Estate. As per the white paper, while institutions continued to increase target allocations to real estate – with average allocations rising to 10.8 percent in 2022, up 10 basis points from 2021 – strong returns last year, combined with the denominator effect, contributed to a marked overallocation in institutional portfolios.

The co-authors reported that 32 percent of the 173 institutional investors surveyed, accounting for a combined $1.1 trillion of real estate, have found themselves overallocated. That is three times as many investors as were overallocated in 2021. This was a key contributing factor to dramatic downward trends seen in investment volumes in the third quarter of the year. “Concerns of overallocation, along with declining conviction, led to a significant slowdown in deployment pacing, beginning in the second quarter of 2022,” Hodes Weill said in its coverage of the monitor, due to be published tomorrow.

No stopping Brookfield…
While many investors are finding themselves overallocated to real estate, this has not stopped one of the industry’s pre-eminent managers from raising a mammoth fund. Toronto-based Brookfield Asset Management has now finished fundraising for its fourth flagship real estate fund, Brookfield Strategic Real Estate Partners IV. The firm took in sizable commitments from the likes of New York State Common Retirement Fund and Minnesota State Board of Investments on its way to a $17 billion close. “Private real assets have proven to be a safe haven, further enhancing their appeal to investors,” chief executive Bruce Flatt said on the firm’s Q3 earnings call. Read our full coverage here.

…Nor CalPERS
When the markets swing, investors are often left with outsize allocations in a number of asset classes. The denominator effect has been mentioned in numerous conversations with the market, particularly when discussing public pensions, given their typically large allocations to public equities. However, not all are ceasing their real estate activity. Notably, California Public Employees’ Retirement System has committed almost $5 billion to real estate in the last quarter. The pension fund invested in almost every fashion, committing most of the capital via separately managed accounts and joint ventures. Partners included GI Partners, BentallGreenOak and Pacific Urban Residential. Other notable commitments included a $500 million investment in IDR’s Core Property Index Trust, a fund-of-funds that invests in NCREIF’s ODCE index, and another $500 million to DigitalBridge‘s Strategic Assets Fund.

Trending topics

Tech cull further dents offices
As if the office sector needed more headwinds, last Wednesday’s news from Meta, one of the biggest office occupiers from the hitherto much-treasured technology sector, that it would cut its headcount by 11,000, or 13 percent of total workforce, brought the next shiver in an already chilling sector. Last Wednesday, chief executive Mark Zuckerberg wrote to staff to inform them of a range of cost-cutting measures, including “shrinking our real estate footprint” and introducing desk-sharing for hybrid workers across its estate.

The firm behind social media platform Facebook is the latest tech business to slash headcount, adding to a list already including Twitter, Intel, Snapchat, Coinbase, Opendoor, Shopify and Lyft. It is also freezing hiring alongside fellow technology giants Apple and Amazon, the latter of which is now also reportedly on the cusp of slashing its headcount. The upshot? Office landlords are fast losing any dependency on this once gold-ticket sector for their tenancies. In commercial real estate’s biggest market, the US, according to broker CBRE, even within falling investment volumes across sectors – down 24 percent year-on-year in the third quarter to $154.5 billion – offices are dropping in prominence among buyers. Indeed, the sector was the third-most traded behind multifamily and industrial and logistics properties.

While retrofitting reality bites
Property owners need to triple the current pace of retrofitting properties to meet the 2050 decarbonization goals that are part of the Paris Climate Agreement, according to a report released last week from JLL. The report, called Retrofitting Buildings to be Future-Fit, painted a stark picture of the level of retrofitting happening versus what is needed, with the advisory finding current retrofit rates are only at around 1 percent each year, compared with a necessary annual target of 3 percent to 3.5 percent. The report also sounded further warning bells for offices of relatively new vintages, noting offices completed five years ago are not likely to be in sync with future expectations for energy standards. One thing to keep in mind: reusing and repurposing existing buildings rather than building from scratch always represents a significant carbon reduction.

Come and meet…

Today, PERE kicks off its final conference of the year, PERE America Summit New York 2022, highlighting the hot-button issues affecting the world’s largest property market. Held over two days at Convene at 151 W. 42nd Street, the event is expected to draw more than 300 delegates and feature more than 70 speakers from top investors and managers such as CPP Investments, QuadReal Property Group, KKR and Morgan Stanley Real Estate Investing. Look out for our Real Estate Group journalists in the audience and onstage at the following sessions:

  • Opening keynote panel, moderated by PERE editor Evelyn Lee
  • Fireside chat with Bridge Investment Group’s Bob Morse, interviewed by PERE senior reporter Peter Benson
  • Fireside chat with Oxford Properties Group’s Michael Turner, interviewed by PERE senior reporter Peter Benson
  • “Investing without a playbook” panel, moderated by Real Estate Capital USA editor Samantha Rowan

Data snapshot

Transaction volume slowing?
In three of the last four years, global real estate transaction volumes eclipsed $1 trillion. This year is charting a similar pattern to pandemic-affected 2020, however, with Q3 2022 volume falling 30 percent year-over-year, according to MSCI’s Global Capital Trends report.

PERE Awards: thank you and next dates

A massive thank you to all the organizations that have entered this year’s

PERE Global Awards season. Submissions for nominations for the 17th annual awards closed at midnight last night, and we are pleased to count more than 400 separate submissions. Now the awards enter their next phase. Here are the dates to keep on your calendar as we get closer to announcing 2022’s winners:

Monday, December 5, 2022 – revelation of nominations, launch of voting.Monday, January 9, 2023 – voting closes.Wednesday, March 1, 2023 – winners are announced.

People moves

Pretium continues hiring spree
Following senior hires from PGIM and GTIS Partners, Pretium has added another top executive to its ranks. The New York-based residential specialist has brought aboard Andrea Gift Allan [her LinkedIn profile here] as a managing director to lead the firm’s affordable housing investments across the US. In the role, she will work on developing and managing Pretium’s affordable housing portfolio. A 20-year veteran of Goldman Sachs, Allan was most recently chief operating officer of the bank’s Urban Investment Group, an investment and lending business focused on community and economic development through real estate projects, social enterprises and lending facilities for small businesses.

Investor watch

Lion State’s fund continues to roar
Singapore’s sovereign wealth fund GIC continues to expand its overseas real estate portfolio by purchasing real estate investment trusts. The fourth-ranked investor on PERE‘s Global Investor 100 list has acquired Toronto-based Summit Industrial Income REIT for C$5.9 billion ($4.4 billion; €4.3 billion), in partnership with Dream Industrial REIT, according to an announcement. The all-cash transaction represents a 31.1 percent premium on Summit’s share price as of November 4. GIC will hold 90 percent of the shares, with Dream holding the rest. The transaction continues a prolific year for the state investor in the real estate market, notably also having purchased STORE Capital, a net lease REIT, with Oak Street for $14 billion in September.

This week’s investor meetings

Tuesday, November 15

Wednesday, November 16

Thursday, November 17

Friday, November 18

Today’s letter was prepared by Peter Benson with Jonathan Brasse, Evelyn Lee, Samantha Rowan, and Christie Ou contributing