However, considering an institutional investor’s investment horizon and the nature of higher bond yields, being overweight to fixed income is a short-term strategy.

Even if a higher inflation or interest-rate era extends beyond 2025, real estate is better placed to offer inflation protection relative to bond investments due to its steady, stable income streams and mid- to long-term return outperformance. 

These characteristics have allowed institutional capital to leverage real estate in portfolios to create stability. Commercial property investments have transitioned from merely enhancing portfolio returns to offering a combination of diversification, return enhancement and risk protection – supporting the longer-term attractiveness to capital.

The growth and maturation of capital in commercial real estate are leading to better and broader risk-adjusted opportunities while offering more strategies across the risk spectrum – such as, but not limited to, recapitalizations, secondaries, joint ventures or ownerships stakes with operators and the growth of alternative strategies. 

In the current market, liquidity provided by real estate secondaries funds has introduced options for general partners (GPs) to recapitalize, rather than sell, investments. More sophisticated global and regional institutional investors have also become more active in co-investments and joint ventures, partnering more directly with operators and investment managers to expand capital deployment, visibility, control and higher return potential. 

For these reasons, in our view, while the higher rate environment has influenced real estate’s attractiveness to institutional investors today, strategic asset allocation targets into real estate, especially in the long run, are expected to remain stable and, for many, trend higher.