Covid-19’s economic disruption was swift and punishing, but it has not derailed institutional capital’s hunger for real estate.
In fact, according to a pair of informal surveys that gathered input from a total of more than 170 investors, many are optimistic about a speedy return to business as usual and eager to commit capital to strategies that will capitalize on freshly minted opportunities.
“On balance, the sentiment was more optimistic than I thought it would be,” Susan Swanezy, a partner at New York-based Hodes Weill and Associates, said of the findings from conversations with more than 100 investors and consultants. For example, “When asked questions about disruption to investment plans, over 50 percent did not anticipate disruption beyond three months.”
The investor perspectives corralled by Hodes Weill were not gathered through a scientific survey, Swanezy notes, but rather by asking clients the same group of questions, primarily over the course of routine business calls. Still, some prevailing opinions became clear, she said, including that real estate is more attractive given the current market conditions.
“Unlike other downturns, when excess supply has been a factor, real estate was not a contributor to this correction,” Swanezy said. “It’s certainly impacted by the pandemic but it’s not a cause and that is relevant for the outlook as well. Investors tend to focus on the strategies that can generate some income during difficult times and real estate can do that.”
Most investors are on the hunt for distressed opportunities and credit-based strategies, according to a similar investor analysis from the New York-based investment firm Lazard. Conversations with more than 70 investors and consultants revealed logistics and multifamily as the property types of choice, with data centers close behind.
Lazard conducted similar conversations with investors and their consultants in March and April, compiling insights from between 60 and 70 groups each time. Its first snapshot report showed that the vast majority of investors had either put their investments on hold or were conducting business as usual. Both approaches have since given way to a more tempered strategy of proceeding with commitments but only to existing investors.
James Jacobs, global head of real estate at Lazard, said his firm is using the prospects of a market dislocation as a selling point for investors weighing the option of making commitments now against waiting for greater stability. “Committing capital today is different from investing cash today,” he said. “Managers will deploy capital into investments over a two- to three-year investment period, which will likely capture the bottom of the market. Investors that wait for the market to reach the bottom may miss it.”
Not all investors share the exact same market view, of course. Larger institutions such as sovereign wealth funds, insurance companies and public pensions have not been deterred by the current environment, with most telling Lazard that they were continuing to invest in real estate as usual or, at the very least, working to finalize commitments already in progress. At the same time, smaller investors such as private wealth managers and family offices were also eager to continue putting money to work.
Groups most likely to have pumped the brakes on new commitments include endowments and foundations, asset managers and fund of funds.
Overall, most investors are still shy of their target allocations to real estate, Swanezy said. More than 60 percent of investors said they are aiming to grow commercial property as a share of their portfolio, with Asia-Pacific investors having the most ground to make up and their North American counterparts the least.
As equity portfolios fell in value amid public market sell-offs in early March, Swanezy said she expected the proportion of capital allocated to real estate to skyrocket, but thus far the denominator effect has not been an issue. Stock markets have since rebounded and real estate markdowns are expected to be reflected after the second and third quarter, she said, meaning many institutions will be eager to make fresh commitments.
However, she said, investors have also been more selective about their partners because of the strict limitations on travel. While some meetings have taken place virtually and a select few deals have closed remotely, these interactions have primarily been between familiar parties.
“There definitely is an interest among investors to get exposure to this vintage, particularly with a safe pair of hands,” Swanezy said. “They are focused on name brand managers that have stood the test of time.”