Many institutional investors take a direct approach to their real estate investments. “Instead of investing directly in properties, they provide capital to developers and funds with real estate expertise to find deals and manage commercial properties,” Bazzano said.
However, the largest institutional investors may have in-house teams that focus on real estate and help identify and manage investments.
Asset Classes and Strategies of Institutional Real Estate Investors
Institutional investors invest in a wide variety of real estate, including multifamily, office buildings and retail, as well as those in newer or more niche sectors such as student housing, self-storage warehouses, data centers and area properties of life science.
“They are looking for best-in-class assets with strong supply and demand fundamentals, proven liquidity and sustainable cash flows. You can find these attributes in many different sectors,” MacIver said.
Institutional real estate investors also use different investment vehicles and strategies, including equity and debt, depending on the balance of risk and return 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 added investments typically include assets that are underperforming but have the potential for strong growth with improved operations or renovations.
- Opportunistic investments often include properties that need significant changes or updates, such as remodeling or repositioning for a new use. Investors take on more risk, but also expect higher returns.
How to raise capital from institutional real estate investors
The sophistication of institutional real estate investors extends to their process for evaluating potential investments.
“Raising capital from an institutional investor typically involves extensive due diligence – especially in the current challenging fundraising environment,” said Randhawa. “If an entrepreneur or real estate fund establishes a relationship with an institutional investor and the initial investments perform well, the investor can become an ongoing source of capital.”
When evaluating investment opportunities, institutional real estate investors consider several factors, including:
- Strategy: Institutional investors usually consider the risk-return profile when looking for an entrepreneur or fund. The timeline also matters. Some institutional investors will invest in closed-end funds with a fixed investment schedule, but others prefer open-end funds that allow them to continue investing for the long term.
- Record: “Institutional investors don’t just want to see high-quality real estate and a sound strategy; they want to know that the entrepreneur or the 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 return have they achieved? Do they have an advantage that sets them apart from the competition?
- Refinement: Institutional investors expect the developers and funds investing their capital to have first-class processes and management, a stable team and reliable reports on the status of investments. Because of these expectations, it is often more difficult for smaller real estate operators to gain access to institutional capital. They may have a better chance of standing out in a new or niche asset class with less established players.
- Overall portfolio and market conditions: Institutional real estate investors should consider their broader portfolio when making decisions. For example, institutional investors may be less inclined 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 these investment decisions more complex. A slow market for real estate transactions can also present challenges, as investors want to be sure their capital can be reinvested in new assets when the time is right.
