Institutions will be cautious investors in 1990s.

Although still hurting from their failed investments of the 1980s, insurance companies and pension funds will continue to invest in real estate through the 1990s, predicts Greystone Realty Corporation, a national real estate investment advisor.

Greystone, which has acquired and invested in a diverse range of real estate product for New York Life Insurance Company since 1988, is now broadening its scope as a third-party consultant and investment advisor for other institutional clients, including pension funds, REITs and other large pools of real estate owned by private investment groups.

Donald E. Conover, Chairman and Chief Executive Officer of Greystone, says that there are three main reasons why institutions will be active but cautious real estate investors.

First, real estate is an important allocation for investment portfolios to achieve true risk diversification. Second, the downward adjustment in real estate values allows investors to acquire assets that earn sufficient cash yields immediately, and are not as reliant on appreciation for overall returns.

Finally, current real estate returns are extremely rich in comparison to other investment alternatives available today. "I would much rather own a fully-rented apartment community yielding 8.5 to 9 percent than almost any junk bond at 9 to 10 percent," says Conover.

Over the next three years, Conover says, public and corporate pension funds are expected to increase their real estate holdings by 30 to 40 percent. Public pension funds are underinvested in real estate relative to their portfolio targets, while corporate pension funds are underfunded, and will be' receiving additional allocations; each will be allocating additional funds to real estate.

"Institutions will change the way they invest in real estate in the future," Conover observes. "Over the next decade, institutions will strategically invest in top-quality assets in markets which promise sustained future growth."

Greystone's experience with its institutional clients suggests the following concerns that institutional investors of all types will have when evaluating different property types:

* Offices: Despite pockets of strength in some suburban office markets, corporate downsizing, changing demographic and lifestyle trends, together with new communication and computer technology, will reduce the overall demand for office space in the future.

* Industrial: Changes in distribution technology and practices will reduce the overall need for space, and will mandate the development of larger, differently-designed facilities. It will not be economically efficient to reengineer many existing distribution facilities.

* Retail: Video shopping, discount retailing, and mail order catalogues will change the way people shop, altering the demand proportions among different types of retail properties.

* Multi-Family: Currently one of the most popular investment types, multi-family will be impacted by changing demographics and lifestyle shifts. The short-term nature of leases of apartments allows investors to respond most quickly to upticks in market rents and conditions.

Conover points out that institutions will also change the vehicles in which they will invest in the 1990s. The illiquidity and lack of control inherent in the "co-mingled" funds of the 1980s will drive institutions to make more direct investments in assets.

First, smaller insurance companies and pension funds which do not have either the personnel resources or monetary allocations to acquire a sufficiently diversified portfolio on their own will co-invest with similarly limited institutions. Such investing will occur through trusted investment advisors.

"Institutions will maintain strict control over their advisors, while disassociating themselves from the demands of daily asset and financial management," Conover observes.

Second, publicly-traded REITs represent an alternative for real estate investment that has gained significant popularity among institutions; the REIT structure can offer investors greater liquidity than direct investment.

However, lack of control and concern that REITs too closely track the stock market have kept institutions from making large allocations to date. In addition, the current capitalization of public REITs is far too small to accommodate significant institutional investment.

Finally, many institutions prefer to earn the illiquidity premium awarded through direct investment. On behalf of its institutional clients, Greystone has been aggressively pursuing investment and development opportunities in select markets, including:

* Newly-constructed luxury apartment communities in select locations in growing metropolitan areas, such as Austin, Charlotte, Miami, and Raleigh/Durham.

* Power retail center and well-anchored community shopping centers in Columbus, Chicago and Atlanta.

* Medium-sized warehouse/distribution facilities located in strong industrial submarkets, including Dallas, Memphis and Seattle.

* Opportunistic acquisitions of well-located, Class A office buildings offering particularly attractive yields, such as Houston.