During the first six months of 2022, the commercial real estate market was bustling with institutional investors taking advantage of a market that was still reeling from the COVID-19 pandemic’s devastation. Now, the gold rush appears to be coming to an end. With inflationary woes still ongoing and the Federal Reserve gearing up for yet another steep interest rate hike, investments from U.S. public pension funds are beginning to dwindle.
Private equity firms managing real estate funds have raised $112.8 billion from pension funds and other institutional investors globally as of October 20, but that amount pales in comparison to the $157.9 billion raised from the same period of the previous year. With reports of pension funds opting to seek capital gains in other sectors to limit exposure, market players predict that fundraising for the fourth quarter will be significantly less than the record-breaking $80 billion raised in the fourth quarter of 2021.
For an industry as interest rate-sensitive commercial real estate, rising borrowing rates are an ill omen, despite real estate’s reputation as an inflation hedge. Because they are unsure of how much values may decline in the event of a recession, pension funds and other major investors are hesitant to dispatch new investments into commercial property at this time.