A profound statement perhaps, but one that investment managers are waking up to.
The issue lies in the growing disparity between the liability-matching requirement of much of the sector’s available investment capital and the way in which tenants in institutional-grade property wish to occupy and, crucially, pay for it.
The topic was discussed at length at both the investor-only and open conference days at last month’s PERE Europe Summit in London.
Occupiers are demanding more flexible occupation and to commit to smaller amounts of space, as well as shorter leases. Being an ‘asset-light millennial’ is not just a personal but a professional characteristic, and the impact of this will be felt by property owners as well as employers.
It was remarked at the conference how the capital markets may be dangerously lagging when it comes to considering how to position real estate investing in the portfolio.
Have investors been so distracted by the recent institutionalization of the asset class and its acceptability as a proxy for fixed-income products that they have taken their eye off how its revenue will be generated? Or are they ploughing on with their real estate commitments, regardless of this evolution, because the alternative options are limited?
That said, not all investors are ignoring the mismatch. On the investor day, one said his institution had stopped acquiring property, apart from homes, since the global financial crisis and a significant proportion of its property allocation had been shifted to technology instead. The thesis was that it is better to invest in real estate as a service than the actual real estate itself. The $16 billion-plus market capitalization of one such service, flexible office trailblazer WeWork, for instance, suggests there is plenty of other capital that agrees.
There are plenty of capital pools, on the other hand, that are not meaningfully engaging with the issue just yet. CBRE said in its Investor Intentions report published in March there was $1.7 trillion in dry powder available for real estate investment; rival Cushman & Wakefield predicted $1.4 trillion of that could be deployed this year. How much of that money is contemplating a tenancy pandemic in the near-to-medium term future? A fraction, most likely.