What is the denominator effect in real estate?

What is the Denominator Effect in Real Estate?

In real estate, the "denominator effect" refers to the phenomenon where institutional investors, such as pension funds and endowments, adjust their allocations to real estate investments relative to other asset classes, primarily stocks and bonds, based on changes in the overall value of their investment portfolios. When the value of other asset classes like stocks and bonds decreases, the relative weight of real estate in the portfolio increases, leading investors to potentially reduce their allocation to real estate to maintain a desired asset allocation. Conversely, when the value of other asset classes increases, the relative weight of real estate decreases, prompting investors to potentially increase their allocation to real estate. This effect can lead to fluctuations in real estate investment activity and capital flows based on changes in the broader investment landscape.