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Surge In ODCE Fund Withdrawals Is Another Worrying Sign for Commercial Real Estate

Signs of stress are flashing everywhere in the commercial real estate market. A recent one is a group of property funds for institutional investors that ended 2022 with $20 billion in withdrawal requests, according to IDR Investment Management, which tracks open-end diversified core equity funds. That amount is the largest since the financial crisis of the late 2000s, showing how some of U.S. commercial real estate’s most prominent investors are lowering their exposures before an expected further slide in property values.

Open-ended diversified core equity funds (ODCE) are run by managers like Morgan Stanley and JPMorgan Chase. Unlike some nontraded REITs like Blackstone’s, ODCE funds don’t specify withdrawal limits. The surge of withdrawal requests has caused many core funds to try to sell their most liquid assets, like in industrial in multifamily. Green Street reports that commercial property prices fell 13 percent in 2022, and a Bloomberg tracker of publicly-traded REITs showed their values dropped 29 percent at the same time.

Investors lining up to withdraw from the ODCE funds isn’t good news, but they’re not abandoning their real estate stakes altogether. The withdrawals may be inflated by those who think they’ll only get a fraction of their requests. The exit line for the funds can also quickly reverse to a waiting line to get back in, which usually happens when the market recovers. Nevertheless, institutional investors are beginning to think their portfolios are overallocated to real estate, a sign that more money is being taken off the table.

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