As confidence in real estate markets has wavered, so too has capital raising for real estate funds.

During the first half of 2024, $70 billion of real estate capital was raised globally in closed-end real estate funds, 25% below the first half average of the prior five years.

At the same time, substantial liquidity remains on the side-lines. Dry powder for commercial real estate totalled $394 billion as of August 2024. The question for investors is how and where that pent-up demand will enter the market.

Some capital is already being deployed into higher-yielding strategies, having been accumulated during the previous cycle. Private credit funds, for example, have been especially active in the past 18 months. As of August, 14% of dry powder globally was targeted at debt strategies, down from as much as 21% in 2018.*

This marks a shift from the previous 24 months, when investors had largely been targeting commercial real estate’s lower-risk investments: core and core-plus opportunities. From 2022 onwards, core capital was drawn down as investors focused on more risk-sensitive strategies and benefited from the low-rate environment. But as risk and return expectations shift, investors have become increasingly demanding of higher returns, with risk-free rates rising, in order to compete with fixed income yields. Core capital will, in our view, have to be increasingly creative to compete in an asset class that now demands higher returns.