Institutional Investor

An institutional real estate investor is a large company or organization with substantial capital and an allocation to real estate investments. Pension funds, life insurance companies, investment banks, sovereign wealth funds, and endowments are examples of institutional investors. Most often, the institutional investor act as the limited partner in a real estate partnership, providing equity capital while relying on the general partner (sponsor) for geographic and property type expertise. Given their size and ready access to the capital markets, institutional investors tend to have a lower cost of capital than their non-institutional counterparts, allowing them to pay more for real estate assets.

Putting ‘Institutional Investor’ in Context

The Atlantic Retirement System (ARS), a state pension fund managing $75 billion in assets, is seeking to diversify its portfolio by increasing its allocation to alternative investments, including commercial real estate. As part of its strategy, ARS identifies self-storage as a growing and resilient sector, particularly in secondary and tertiary markets across the Southeast United States, where population growth and migration trends are driving demand.

To access this opportunity, ARS commits $200 million to Sunrise Self-Storage Fund III, a $1 billion closed-end fund managed by Horizon Capital Partners, a private real estate investment firm specializing in self-storage. The fund’s strategy focuses on core-plus acquisition investments, targeting properties with stable cash flows and modest upside potential through operational improvements and minor capital expenditures.

ARS’s Role as an Institutional Investor

In this partnership, ARS acts as a limited partner (LP), providing a significant portion of the equity for the fund. As a pension fund, ARS benefits from its substantial capital reserves and access to low-cost capital, enabling it to commit large sums to a diversified pool of real estate assets. ARS relies on Horizon Capital Partners, the general partner (GP), for expertise in sourcing, underwriting, and managing self-storage properties in the target markets. The GP will also implement value-creation strategies, such as optimizing occupancy, raising rental rates, and enhancing operational efficiencies.

Target Investment Characteristics

• Secondary and tertiary markets in Georgia, Florida, and the Carolinas.
• Self-storage facilities with existing occupancy levels of 85% or higher.
• Properties with potential for value enhancement through technology upgrades, improved management, and branding.

Why ARS Invests in Funds

As an institutional investor, ARS values the diversification and professional management offered by Sunrise Self-Storage Fund III. Investing in a fund also aligns with ARS’s mandate to deploy large amounts of capital efficiently while outsourcing the operational and market expertise required to succeed in niche sectors like self-storage. Additionally, the closed-end structure of the fund provides ARS with a clear investment horizon and projected returns, typically ranging from 10–12% net IRR for core-plus strategies.

This hypothetical scenario illustrates how institutional investors, such as pension funds, leverage their scale and access to capital markets to participate in real estate partnerships, relying on specialized GPs to achieve their investment objectives.