Institutions losing faith in commercial real estate

Big institutions have begun selling off commercial real estate — another sign that the market is weakening amid rising interest rates and a surge in new supply.

Firms like Brookfield Asset Management sold more properties than they bought last year.

“We definitely have a risk-off mentality,” United Parcel Service Inc.’s pension fund portfolio manager Judy McMahan told the Wall Street Journal. “We’re being careful.”

The uptick in seller interest comes as demands for trophy properties shrinks. Over all commercial real estate sales volume fell by $58.3 billion, or 11 percent in the first half of 2016, according to Real Capital Analytics, marking the first dip since 2009.

Brookfield sold a net $3 billion in real estate last year and plans to sell another $1 to $2 billion this year. It is currently marketing a 49 percent stake in Manhattan’s Brookfield Place office complex. “We think now is an opportune time to reduce some of our exposure to that asset,” the firm’s senior managing partner Brian Kingston told the Journal. “We can recycle the capital into higher returning investment opportunities.”

There are two main reasons why large institutions are less bullish on acquisitions: rising interest rates, which make bonds look more profitable compared to real estate, and a surge in new construction that is increasing supply and pushing down prices.

A benchmark index compiled National Council of Real Estate Investment Fiduciaries shows that real estate returns still rose in 2016, but at a sharply slower pace than in years prior. [WSJ] — Konrad Putzier