Private real estate funds generated strong returns in 2021, driven by higher values. However, the sector will be hard-pressed to duplicate the feat this year as real estate faces a more difficult landscape, driven by a potentially slowing U.S. economy due to higher interest rates and geopolitical events.
Money flowing in: Private real estate funds have raised more than $22 billion through April 21, about 40% more than the same period a year ago. The $70.7 billion raised last year was the most since P&I began tracking fund closings of at least $1 billion in 2010.
Fund closing volume (billions)
Skyrocketing returns: Last year, private real estate funds returned more than 22% net of fees, led by returns of 6.4% and 7.7% in the third and fourth quarters, respectively. Performance varied by property type, however. Industrial real estate and apartments performed well, while retail and office properties lagged.
Quarterly net returns
Plans get real: IDefined benefit plans have increased average allocations to real estate to 7.3% as of Sept. 30 from 4.3% in 2006. Public and union pension funds in particular have upped allocations significantly, while corporate plans have lagged.
DB plan real estate allocations
Near-term caution: In the fourth quarter, the NCREIF Property index showed a price gain of 5.1%, the highest since the index began in 1978. But during past economic slowdowns, such as during the early days of the COVID-19 pandemic, real estate prices lost ground.
NCREIF Property index price change
*As of April 21. Sources: National Council of Real Estate Investment Fiduciaries, Pensions & Investments, Bloomberg LP