Institutional investors are sticking with their real estate allocations even as they face the prospect of negative returns, according to the 2023 Institutional Real Estate Allocations Monitor, published by advisory firm Hodes Weill & Associates and the Cornell Baker Program in Real Estate.

Institutional investors anticipate their real estate portfolio returns will continue to decline substantially and may turn negative as a result of private portfolios taking further write-downs.

The National Council of Real Estate Investment Fiduciaries' diversified core equity index, which represents core returns, generated negative returns from the fourth quarter of 2022 through the second quarter of this year, representing cumulative depreciation of 12.4%, the report says.

That is also the longest continuous period of negative returns since Q4 2009, when markets were in the throes of the Global Financial Crisis.

The prospect of negative returns comes in the wake of strong annual real estate returns for institutional investors in recent years. Returns in 2021 averaged 17.1%, the strongest annual performance in a decade. In 2022, institutions saw average real estate portfolio returns of 9.5%, according to the survey, consistent with historical returns and the second-highest level in the last decade.

Despite the recent declines, institutional investors haven't cut their allocations in real estate, holding them flat year-over-year, the survey found. Institutions held to an average target allocation of 10.8% between 2022 and 2023, although the year-over-year hold marks the first time since the 2013 launch of the survey that institutions haven't reported an increase in target allocations in real estate.

Despite turmoil in CRE, investors continue to favor value-add strategies. More than 25% of institutions expect to invest more capital in opportunistic and value-add strategies, while about 10% plan to do so in core and core-plus. The U.S. is still the preferred worldwide destination for investment in real estate.

The survey collected data from 175 international, institutional investors with about $10.2T in assets under management, of which real estate holdings accounted for about $1.1T.