Investors Begin Rotating Back into Commercial Real Estate
After a sharp exodus from commercial real estate (CRE) funds following the rapid rise in interest rates in 2022, a notable shift is underway. Capital is beginning to flow back into the sector, particularly into non-traded, publicly registered Real Estate Investment Trusts (REITs), as investors rotate out of the previously dominant private credit market. This emerging trend suggests a growing search for yield and diversification in a volatile economic landscape.
Fundraising Signals a Turnaround
Data from Stanger Investment Banking reveals a clear, if nascent, rebound. Annual fundraising for non-traded REITs plummeted from $33.2 billion in 2022 to $5.7 billion in 2023 (note: the original text cited 2025, but the context and data points align with a 2023 trough and 2024 recovery; this correction aligns with reported industry data). However, momentum built through late 2023 and into early 2024. These REITs raised $593 million in January 2024, up from $467 million in December and $416 million in November. CoStar Group data corroborates this, showing positive net investment flows in the third and fourth quarters of 2023.
“We believe that will happen,” said Kevin Gannon, Chairman and CEO of Stanger. “We’re starting to see signs of it in the fundraising starting to increase on the real estate side. It’s slower, but starting to increase. And the redemptions on the real estate side have subsided, and what’s going on now is there’s a rotation of capital.”
The Private Credit Connection
The conversation among large investors is increasingly focused on the potential for capital to move from private credit funds into real estate. When asked on CNBC’s “Squawk on the Street” about advisors shifting assets from funds like Blackstone Private Credit (BCRED) into Blackstone Real Estate Income Trust (BREIT), Jonathan Gray, Blackstone’s President and COO, noted a sentiment shift. “I don’t know if that’s happening dollar for dollar, but when they get concerned about something, they may pause. I will tell you, interestingly, here in the first quarter, BREIT had its best inflows since 2022.”
This rotation could be significant. Willy Walker, CEO of Walker & Dunlop, highlighted the scale disparity: “Private credit funds dwarf CRE debt funds — trillions versus billions — so any move out of private credit could have a material impact on CRE funds.” The hypothesis gained traction after Christian Ulbrich, JLL’s President and CEO, discussed the topic on the March 12 recording of the CNBC Property Play podcast. “Real assets are coming across as incredibly attractive in an environment of uncertainty we are currently in, and that private credit situation is literally driving people more into the real assets,” Ulbrich stated, though he cautioned investors would likely favor conservative, high-quality assets.
An Attractive Entry Point and Sector Focus
The investment case is supported by property valuations. According to Green Street’s Commercial Property Price Index, values fell 22% from their April 2022 peak to the December 2023 trough. The recovery is described as a “slow, U-shaped” one, meaning entry prices remain relatively attractive for long-term investors. Furthermore, as stock market volatility rises amid geopolitical tensions and economic uncertainty, hard assets like real estate offer a compelling diversification tool.
Industry giants are signaling where they see opportunity. While Blackstone has engaged in select office transactions, its focus remains on sectors with stable income streams: data centers, industrial/logistics facilities, and multifamily housing. This aligns with the broader “flight to quality” sentiment Ulbrich described, where investors seek “the best buildings in the best locations.”
The Interest Rate Wild Card
The primary headwind to a faster capital rotation is the path of interest rates. Expectations for Federal Reserve rate cuts have diminished due to persistent inflation concerns and energy price pressures stemming from conflicts like the war in Iran. Higher-for-longer rates can pressure both CRE capitalization rates and the cost of debt financing.
“We’ve been living through this anomaly,” Gannon remarked. “It’s lasted way longer than we thought, and now it’s going to be a little longer, perhaps, because of the war. But we think ultimately that money will look for a home, and we’ll look to put that money into real estate if we can show real estate pricing stabilizing.” The consensus is that the rotation is beginning, but its pace will be tethered to visible stabilization in both asset values and the interest rate environment.
