Investor watch: Commitments drop amid slow capital raising environment

Despite a surge in institutional allocations to commercial real estate debt in 2022, the first three months of 2023 saw a sluggish start, with just $800m committed to five funds in North America.

Institutional investor commitments to debt-focused commercial real estate debt funds in North America got off to a slow start in the first three months of 2023, with just $800 million committed to five funds.

The number of commitments reflects a broader slowdown in capital allocations to all real estate funds globally, according to data from affiliate title PERE. There were a number of reasons behind the drop, including negative press for the commercial real estate market, broader economic volatility and uncertainty, and a well-documented drop in dealflow.

Two of the five commitments in the quarter were from Texas Permanent School Fund, which allocated $50 million to Pennyback Capital’s Pennybacker VI and a similar amount to Berkshire Residential Investment’s Berkshire Bridge Loan Investors-MF1. CPP Investments, Teacher Retirement System of Texas and New York State Common Fund were among the institutions that allocated capital to North American-focused debt funds.

The slow first quarter is a contrast to 2022, in which institutional allocations to commercial real estate debt rose substantially, as tracked by Real Estate Capital USA‘s annual ranking of debt managers.

The Real Estate Capital USA Debt Fund 40, published next month, ranks managers by the level of capital raised from external investors in the preceding five years. It found that the 40 largest firms raised $164.8 billion for the five years ending in 2022 – an uptick from the $132.1 billion raised for the five years ending in 2021.

Despite a slow quarter, there are a number of debt funds in the market with lofty goals and a sense that once there is more stability in the broader financial markets, allocation activity will resume.