Institutional real estate investors, such as pension funds, endowments, foundations and sovereign wealth funds are a key source of capital for real estate developers, operating companies, asset managers, investment funds and trusts.
Like many investors, these institutions are attracted to real estate’s potential for diversification and solid returns. But their scale and sophisticated approach to investing—based on deep knowledge and experience—set them apart.
Three JPMorgan Chase experts—John Bazzano, Senior Client Executive for Real Estate Banking, Andrew MacIver, Managing Director for Corporate Client Banking and Specialized Industries, and Pretika Randhawa, Executive Director and Head of Commercial Banking National Subscription Lending Platform—shared their insights on what institutional investors look for when evaluating commercial real estate investment opportunities.
Real estate’s role in institutional investors’ portfolios
“Institutional investors differ from retail investors due to their large balance sheets and presumed sophistication,” MacIver said. “They work with many of our clients in an effort to diversify their investment portfolios across fixed income alternatives including real assets. Typically, 8% to 15% of their total investments are in real estate.”
Many institutional investors take a hands-off approach to their real estate investments. “Rather than investing in properties directly, they provide capital to developers and funds with the real estate expertise to find deals and manage commercial properties,” Bazzano said.
The largest institutional investors, however, may have internal teams that focus on real estate and help identify and manage investments.
Institutional real estate investors’ asset classes and strategies
Institutional investors invest in a wide variety of real estate assets, including multifamily properties, office buildings and retail, as well as those in newer or more niche sectors, such as student housing, self-storage, data centers and life science properties.
“They’re looking for best-in-class assets with strong supply and demand fundamentals, proven liquidity and durable cash flows. You can find those attributes in many different sectors,” MacIver said.
Institutional real estate investors also use a variety of investment vehicles and strategies, including both equity and debt, depending on the balance of risk and returns they seek.
Investments can fall into one of three categories, each with different expectations:
- Core assets are high-quality, stabilized properties that have lower risks and tend to come with lower returns.
- Value-add investments typically involve assets that are underperforming but have potential for strong growth with improved operations or renovations.
- Opportunistic investments often involve properties that need significant changes or updates, such as redevelopment or repositioning for a new use. Investors take on more risk but also expect higher returns.
How to attract capital from institutional real estate investors
Institutional real estate investors’ sophistication extends to their process for evaluating potential investments.
“Attracting capital from an institutional investor typically involves extensive due diligence—especially in the current challenging fundraising environment,” Randhawa said. “If a developer or real estate fund establishes a relationship with an institutional investor and initial investments fare well, the investor can become an ongoing source of capital.”
When evaluating investment opportunities, institutional real estate investors look at several factors, including:
- Strategy: Institutional investors typically have a risk-return profile in mind when looking for a developer or fund. The timeline also matters. Some institutional investors will invest in closed-end funds with a fixed investment timeline, but others prefer open-ended funds that allow them to continue investing for the long term.
- Track record: “Institutional investors don’t just want to see top-quality real estate assets and a sound strategy; they want to know the developer or fund is capable of executing that strategy,” MacIver said. Does the developer or fund have experience with the asset type and strategy, including experience navigating challenging market conditions? What returns have they achieved? Do they have an edge that differentiates them from competitors?
- Sophistication: Institutional investors expect developers and funds investing their capital to have top-notch processes and governance, a robust team and reliable reporting on the status of investments. Because of these expectations, it's often harder for smaller real estate operators to access institutional capital. They may have a better chance of standing out in a new or niche asset class with fewer established players.
- Overall portfolio and market conditions: Institutional real estate investors have to consider their broader portfolio when making decisions. For example, institutional investors may not be as willing to invest in real estate if a downturn in one type of investment leaves them with too large a share of assets allocated to real estate. Market volatility can make those investment decisions more complex. A sluggish market for real estate transactions can also create challenges, as investors want to be confident their capital can be reinvested in new assets when the time is right.
Institutional investment opportunities are among several options for raising capital for real estate.
