Key Takeaways
- • Institutional investors are rethinking real estate allocations because the asset class is no longer viewed as a reliable inflation hedge, following the 2022 break in that narrative, when inflation spiked but income-oriented real estate assets underperformed over the next two years.
- • Cohen and Steers' head of real estate strategy and research, Seth Laughlin, argues that interest rates have not been driving real estate markets as much as investors believe, and that capital is instead chasing growth assets such as AI, leaving income-driven real estate undervalued.
- • Industrial and multifamily are the core real estate sectors drawing the most institutional enthusiasm outside AI data centers, while Laughlin says senior housing will be "as strong as it's ever been over the last 20 years."
- • Cohen and Steers believes investors are overallocated to apartments, citing falling values and rising cap rates, and warns the rebound in apartment fundamentals has been overstated.
- • Yale's Cameron LaPoint sees a shift toward middle-risk core and core-plus assets over distressed post-Covid opportunities, and notes that A-plus office is recovering in New York and the San Francisco Bay Area while suburban office is attracting deals.
Summary
Institutional investors are recalibrating their real estate allocations as structural changes reshape the asset class. According to Institutional Investor, factors including trade wars passing costs onto new construction, weakening confidence in government policy, and rising capitalization rates have led allocators to reconsider real estate, which is no longer viewed as an inflation hedge. Cameron LaPoint, assistant professor of finance at Yale School of Management, said he is seeing growing interest in middle-risk assets such as core and core-plus, as opposed to the more distressed assets that emerged from Covid.
The inflation-hedge thesis weakened after the pandemic lifted industrial and residential rents in 2021 and 2022. Inflation spiked in 2022, but income-oriented real estate performed poorly over the following two years. Because long-term inflation expectations remained low, landlords could not justify raising rents to match rising price levels.
Cohen and Steers CEO Joseph Harvey said that "real estate is definitely still a diversifier," though its sectors are now driven by different fundamentals. Seth Laughlin, the firm's head of real estate strategy and research, argued that interest rates have mattered less to real estate pricing than investors assume. He said capital has instead gravitated toward growth, in both private and public markets, with investors chasing the AI trade while undervaluing income-driven real estate. He compared the dynamic to the end of the tech bubble.
Excluding AI data centers, Laughlin said the bulk of institutional capital in core real estate is concentrated in industrial and multifamily, with the most enthusiasm there. He expects senior housing, which was hit by the pandemic, to be as strong as it has been in 20 years. He cautioned, however, that investors are overallocated to apartments, saying the enthusiasm for an apartment rebound "has been overstated," and pointed to falling values and rising cap rates.
LaPoint identified bright spots in office. A-plus office is recovering in New York City and the San Francisco Bay Area, and suburban office has become a sought-after segment that is "getting a lot of the deals these days." He also referenced recent research with Gustavo Cortes of the University of Florida showing that local building permit activity can help predict future financial market conditions.
The inflation-hedge thesis weakened after the pandemic lifted industrial and residential rents in 2021 and 2022. Inflation spiked in 2022, but income-oriented real estate performed poorly over the following two years. Because long-term inflation expectations remained low, landlords could not justify raising rents to match rising price levels.
Cohen and Steers CEO Joseph Harvey said that "real estate is definitely still a diversifier," though its sectors are now driven by different fundamentals. Seth Laughlin, the firm's head of real estate strategy and research, argued that interest rates have mattered less to real estate pricing than investors assume. He said capital has instead gravitated toward growth, in both private and public markets, with investors chasing the AI trade while undervaluing income-driven real estate. He compared the dynamic to the end of the tech bubble.
Excluding AI data centers, Laughlin said the bulk of institutional capital in core real estate is concentrated in industrial and multifamily, with the most enthusiasm there. He expects senior housing, which was hit by the pandemic, to be as strong as it has been in 20 years. He cautioned, however, that investors are overallocated to apartments, saying the enthusiasm for an apartment rebound "has been overstated," and pointed to falling values and rising cap rates.
LaPoint identified bright spots in office. A-plus office is recovering in New York City and the San Francisco Bay Area, and suburban office has become a sought-after segment that is "getting a lot of the deals these days." He also referenced recent research with Gustavo Cortes of the University of Florida showing that local building permit activity can help predict future financial market conditions.
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