- Institutions are projected to lower CRE target allocations by 10% on average in 2025, signaling continued caution after 2023’s negative returns.
- In 2023, 40% of institutions reported over-allocating to CRE, but 2024 allocations have since dropped below targets by as much as 60 bps.
- Performance differences between CRE and other asset classes led to a reassessment of allocations, with a 2024 target return of 8.6% yet to be fully realized.
As reported in GlobeSt, institutional interest in commercial real estate has weakened following a decade of strong performance. Investors are now planning to reduce their CRE allocations for 2025.
By The Numbers
According to the latest Institutional Real Estate Allocations Monitor report, institutions saw their CRE portfolios underperform against target returns, with overall negative returns of -1.4% (dropping to -2.3% in the Americas) in 2023.
Institutional targets for CRE allocations hit a record high of 10.8% in 2022, holding steady through 2023 and 2024. However, in 2023, a notable number of institutions were over-allocated by up to 200 bps, resulting in an adjustment. By September, CRE portfolios fell to 60 bps under their targets.
Growing Concerns
The report, which surveyed 186 participants with $13.6T in assets under management, indicates a material shift in investing strategies going into 2025.
Returns on institutional CRE investments began to decline in 2023 after years of outperforming target returns. The downturn contrasts sharply with strong returns in previous years, with 2021 achieving a high of 17.1% and 2022 maintaining a solid 9.5%.
The recent 2023 drop to -1.4% appears to have prompted institutions to reevaluate their portfolios, especially as public equities and other asset classes demonstrated stronger returns.
Investment managers may pursue lower target allocations in the coming year, wary of anticipated volatility in real estate returns. Among respondents, 27% are still over-allocated to real estate, a drop from 39% in 2022, indicating a conservative approach to rebalancing portfolios.
Get Smarter about what matters in CRE
Stay ahead of trends in commercial real estate with CRE Daily – the free newsletter delivering everything you need to start your day in just 5-minutes
Subscribe
Future Outlook
Institutional conviction in CRE has remained moderately positive since the Fed’s September rate cut but is still not where it could be.
The target return for CRE in 2024 remains ambitious at 8.6%, but as investment managers await year-end results, the previous downturn could leave some skeptical of continued strong returns.
Unsurprisingly, the biggest mover for the CRE markets may still be the Fed’s rate cut decisions leading into next year.
