Even Institutional Investors Are Eager for Distress

Institutions are decreasing core and value add allocations to make room for distress in their portfolios.

It is a truism that institutional investors in commercial real estate tend to play it safe, preferring core land value-add strategies and properties in gateway markets. In recent years many of these funds have pushed the envelope to consider secondary market investments but 2020 marked a significant pivot for these funds: a focus on distress.

This, of course, is little surprise given the economic upheaval caused by the pandemic. Many, many investors have lined up to take advantage of such opportunities, even though the pipeline of deals has been less bountiful than expected as lenders worked hard with borrowers to keep loans current.

Still, institutional investors’ appetite for high-return CRE strategies this year is clear, according to Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates eighth annual Institutional Real Estate Allocations Monitor. “While value add strategies remain the strongest preference for institutions globally, investors are shifting a greater allocation of their portfolios to opportunistic strategies in anticipation of market distress and dislocations,” it says.

This shift is occurring even as CRE returns have been higher than anticipated, generating an average 8.5% last year versus a return target of 8.3%. The five-year average return for all institutions outpaced target returns by almost 100 bps.

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