“Generally, investors still feel very good about the asset class, but they are more cautious,” said Lori Campana, partner in the Boston office of Monument Group Inc., an alternative investment placement agent. “They realize there is significant overhang of dry powder with the successful recent fundraising cycle.”
Ms. Campana said she expects investors in 2016 “will continue to gravitate to experienced managers with good track records and the U.S. will be favored by U.S. and non-U.S. investors.”
Real estate funds worldwide had a record $244 billion in uncalled capital as of Sept. 30, up from $197 billion in December 2014, according to Preqin, the London-based alternative investment research firm.
Meanwhile, rising prices could be a sign that the real estate market is getting overheated, potentially leading to lower returns.
Sixty-three percent of real estate investors responding to a recent Preqin survey indicated valuations are a key concern for the real estate market next year, with 37% indicating deal flow is a concern and 30% stating the eventual performance of real estate investment vehicles is a concern.
Prices are rising and capitalization rates — a measure of the anticipated return on real estate based on expected income from the property — are falling to historic lows, said Peter Hobbs, managing director, real estate research in the London office of MSCI Inc.
“These are signs that the market is getting too hot,” Mr. Hobbs said. “It could move into bubble territory or it could slow down and have a gentle landing.”
Towers Watson's Mr. Rogers said investors should think about making investments that can withstand a real estate downturn.
These defensive investments include specialty property sectors such as student housing, self-storage, senior housing or medical offices, Mr. Rogers said. The demand drivers for these niche strategies depend on secular trends, such as demographics, over trends that are correlated to the state of the economy, he said.
“We think it's defensive to invest in anything related to housing,” said Bob Faith, CEO in the Charleston, N.C., office of multifamily real estate money manager Greystar Real Estate Partners LLC. Greystar invests in housing for active adults, student housing and conventional apartments.
“Housing is way less volatile than other (real estate) product types,” Mr. Faith said.
The reason is that demand for housing is from individuals, while demand for other sectors, such as office and industrial space, is from businesses. “In a downturn, a company could disappear or not fill up space ... until the recession is over. In housing, the people are still here. They have to live somewhere.”
Even so, some industry executives say the market is in much better shape than it was before the financial crisis.
“In conversations I have had during the past two months with numerous real estate executives from (real estate investment trusts), private equity firms and banks, not one of them have believed that real estate is on the precipice of a significant downturn,” said Robert O'Brien, global and U.S. real estate industry sector leader for Deloitte, based in the consulting firm's Chicago office, in an e-mail. “Although there is some possibility of transaction volume slowing and pricing not being as rich, strong fundamentals and strengthening economic activity should be good for real estate overall.”
Matt Khourie, Los Angeles-based CEO of CBRE Global Investors, expects increased investments into real estate globally.
“We have a global separate account business that we enhanced at the beginning” of 2015 to help global asset owners that are looking to invest outside their home countries, Mr. Khourie said.