Clarion: CRE Investable Universe Stands at Nearly $27T, Institutional Capital $12T

Like our greater cosmic universe, the investment universe of commercial real estate is inexpressibly large and appears to be expanding.

A new report from Clarion Partners provides a granular view on the size and scope of the commercial real estate investable universe, estimating that the entire investment landscape U.S. CRE stands at $26.8 trillion, of which, $11.7 trillion is made up of institutional capital. 

The Clarion Partners report emphasized that the size of the institutional universe is “over 10 times the size of the largest commercial real estate index, the NCREIF [National Council of Real Estate Investment Fiduciaries] Property Index.” 

Indy Karlekar, head of global research & strategy for Clarion Partners, and an author of the report, called the $12 trillion in institutional capital devoted to CRE “a sizable chunk,” and said that the institutions, whether they are pension funds or large private investors like family offices, tend to have “strategic allocations” into commercial real estate.

“It can be from 5 percent to 6 percent on the low end of their overall portfolio, to as much as 18 percent to 19 percent on the high end of their portfolio,” said Karlekar. “Depending on the asset-liability match they’re working on, they usually have a large and strategic allocation to real estate. From a long-term perspective, from an institutional perspective, I think the dollars that will flow into CRE will continue to be robust due to the strategic nature of the allocation.” 

The traditional “core five” asset classes — industrial, multifamily, office, retail, and hotels — account for $16.9 trillion in total value, or 63 percent of the investable universe. Within the $11.7 trillion institutional subset, the traditional asset classes make up 70 percent of the capital allocation, according to Clarion. 

“The fundamentals, excluding office, are pretty good [for them],” Karlekar said. “Office is obviously troubled due to work-from-home, reduced occupancy, reduced corporate footprints, but if you leave that out, the other sectors in CRE, whether it’s industrial, retail, apartments, are actually in pretty good shape.”

Within the $11.7 trillion institutional investable universe, multifamily makes up 22.5 percent, retail 18.5 percent, office 12.3 percent, industrial 11.5 percent, hospitality 5.1 percent. 

The largest asset class? Alternatives, which make up 30.5 percent of the institutional CRE investment space with $3.6 trillion of capital. 

Among the largest subsets attracting institutional capital within alternatives are single-family rental housing ($1.3 trillion alone), student housing, age-restricted housing, medical office, senior housing, self storage and data centers. 

Karlekar told CO that the the institutional world has embraced the use of alternatives in the listed space “for quite a while now,” as private investors stepped into the alternative space as long as 15 years ago when they started to acquire single family rentals 

“That was sort of the first step into the alternative property world,” he said. “What’s happened now, is that the universe has expanded significantly, and the long story short is what was once considered to be the ‘core five’ within the international world is now the Big 12: housing adjacent like single family rentals, student housing, senior housing, warehouses, industrial outdoor storage, cold storage, and data centers.”

Mainly on the backs of self storage and life sciences, the alternative sector share of the NCREIF Open-End Diversified Core Equity Index (ODCE) rose from 4 percent in 2017 to nearly 13 percent in the second quarter of 2024, according to Clarion. 

With so much institutional capital flowing into these new asset classes, Karlekar expects the $28 trillion CRE investable universe to continue to expand in the years ahead. 

“If you kept it simple and said the CRE market will grow at the rate the U.S. economy grows, and if you assume the economy grows at a 2 percent rate, just by that math it could grow by over $550 billion on an annual basis,” he said. “However, it won’t be linear. There will be some good years, and some years the economy won’t do so well, but using that rough rule of thumb, it will grow that size annually.” 

Brian Pascus can be reached at bpascus@commercialobserver.com