Real Estate Capital Flows 2021-2030
As discussed, most traditional real estate sectors are facing secular headwinds while alternative sectors have long-term demand drivers. Consequently, the average institutional real estate portfolio should change dramatically over the next decade.
Allocations to traditional office and retail will shrink, making space for alternative sectors. The largest private equity players are already starting to expand their strike zone into niche sectors. Blackstone recently made major investments in Hollywood studios, cell towers, manufactured housing, single family rentals, cold storage and life science buildings. This trend is projected to result in real estate alternatives growing from 12% to 50% of intuitional real estate holdings this decade.
Real estate private equity firms have - and will continue to - raise record amounts of cash to deploy into these niche strategies.
One would assume it’s difficult to raise billions of dollars via Zoom, but don’t tell that to the largest PE firms. Total fundraising dropped 32% to $111B (after a record 2019). Yet, the average size per fund in 2020 was at an all-time high of $629M.
Now add in reduced transactions in 2020 and an abundance of cheap debt (which limited distressed sales). That equates to a wall of capital still to be deployed into commercial real estate. This is likely to keep pricing elevated over the near term.
This reallocation to niche strategies is just starting in the private markets. However, we're seeing this dynamic play out much faster in the public markets, where the niche sectors have already raised more capital recently and are commanding premiums relative to private market net asset values (NAV).
We’ve created our portfolios to avoid the value traps in traditional real estate sectors, focusing instead on firms positioned for long-term growth (and private equity capital inflows).