After several years of explosive growth, the market for high-yield real estate funds is slowing.

The total amount of equity managed in closed-end funds fell for the first time since 2013, according to Real Estate Alert’s 24th annual review of the fund industry. Other key metrics including the number of fund operators in the market and number of vehicles that held a final close also dipped.

“It does feel a little slower out there,” said Alan Pardee, co-founder of New York placement agent Mercury Capital. The market is “still healthy — it’s still one of the strongest years we’ve had overall — but it’s got a slightly different tone.”

The big question now is to what extent economic damage from the corona- virus pandemic dampens fund performance and suppresses investor appetite. “The prognosis for the near term is extremely challenging,” said Bill Thompson, senior managing director in Evercore’s private-capital advisory group. “The market hasn’t stopped, but with limited face-to-face meetings, expect long capital-raise periods.”

To be sure, the size of the fund universe remains in record territory — by any measure, substantially larger than it was at the last cyclical peak. The number of commingled vehicles seeking 10%-plus net returns ticked up to 533, from 528 a year earlier. And the total amount of equity being sought by managers increased 1.6% to a high of $411 billion.

But the number of fund sponsors dropped to 418, from a high of 426 a year ago. And fewer of them reached the finish line for vehicles they were marketing. The number of funds that held a final equity close fell to 123 in 2019, from 140 the year before and a high of 146 in 2017.

Perhaps the most telling indicator of a market slowdown is that the aggregate amount of equity raised by active vehicles declined 2.4% to $307 billion. During the previous four years, that figure had climbed an average of 16% annually.

Even as fund raising fell for the first time in seven years, the amount of uninvested capital continued to rise, lion. As a percentage of equity raised, the amount of dry powder increased to 74.9% — the highest level since 2009 and a clear sign that managers have been finding it increasingly difficult to put money to work. “Everyone has been struggling to find deals,” said Walter Stackler, founder of New York placement agent. Shelter Rock Capital.

That reality is reflected in the return target of the average high-yield real estate fund, which fell to 14.4%, after fees, from 15.1% a year earlier. That’s the sharpest drop in more than 10 years, though the figure has been drifting lower for almost two decades.

It’s no wonder that the number of opportunity funds, which seek net returns of 16% or more, has been on the decline, while managers have been teeing up more value-added and core-plus vehicles, which target lower returns. The count for opportunity funds has plummeted to 113, from 184 in 2014. During the same period, the number of value-added funds has shot up to 264, from 142. For core-plus funds, the number has nearly doubled to 69, from 36.

The industry’s rapid growth in recent years largely was driven by institutional investors, which began ratcheting up their real estate allocations in the wake of the global financial crisis. While fund returns may still appear attractive on a risk- adjusted basis, there are indications that investor demand may be peaking.

An annual investor survey by Cornell University’s Baker Pro- gram in Real Estate and advisory shop Hodes Weill & Associates found the average target allocation for real estate is projected to rise to 10.6% this year, from 10.5%. That’s the smallest increase since the survey’s inception in 2013. “The rate of increase has been in the range of 20-40 bp over the past five years,” according to the latest survey report.

Douglas Weill, founder and co- managing partner of New York- based Hodes

Weill, said institutional investors turned more cautious in the past year. “Investors were moving more slowly in terms of making investment decisions,” he said.

Weill noted that the sharp drop in stock and bond prices in recent weeks could prompt investors to slow the pace of their real estate investments due to the so-called denominator effect. As the values of their securities portfolios decline, institutions’ real estate holdings suddenly account for a larger per- centage of total assets.

“How many institutions are going to find themselves over-allocated to real estate?” Weill wondered. “We’re starting to see that the past couple of weeks.”

Real Estate Alert’s review high- lights a bright spot for small and mid-size fund managers: The combined market share of the big- gest operators dipped in the past year after climbing steadily for several years. The top 10 managers accounted for 33% of the total equity raised, down from a record 37% a year earlier. The top 25 firms corralled 47% of the total, down from 50% a year earlier.

Blackstone remains the industry’s undisputed champ. The investment behemoth finished marketing the largest-ever real estate fund last year, closing on $20.6 billion of equity. Other managers of megafunds that held final closes since the start of 2019 are Brookfield ($15 billion), Lone Star Funds ($4.6 billion), TPG ($3.7 billion), Angelo, Gordon & Co. ($2.75 billion), KSL Capital ($2.7 billion), Westbrook Capital ($2.5 billion), Gaw Capital ($2.2 billion), Ares Manage- ment ($2 billion) and Greystar Real Estate ($2 billion).

The prevalence of $1 billion-plus vehicles lifted the average fund to a record $771 million. The average size has risen for seven consecutive years.

While the concentration of capital among the largest man- agers is at a five-year low, fund-raising conditions for smaller shops remain challenging.

“If you’re an incumbent and you’re on Fund 4 or 5 or 6, you get your money raised,” said Shelter Rock’s Stackler. “If you’re a new guy, it’s really hard. That’s not going to change.”

And the coronavirus outbreak has added a new wrinkle for fund marketers.

“There are certainly LPs that are being very measured about their own travel, who they’re letting into their offices and all the rest,” said Pardee, of Mercury Capital. “We really don’t know what to make of the future.”

Assuming the pandemic is short-lived, the impact on the real estate market could be minimal, Pardee added. “We’re still dealing with a buoyant market in the context of transactional activity . . . with the asterisk of coronarvirus,” he said. “But overall, the market is healthy. If it’s slowed down a little, it feels like it has the ability to ramp back a lot.”

Real Estate Alert’s review tracks property and debt funds that raise capital at least partly from U.S. investors, that invest mostly in U.S. commercial real estate, or both. Of the 533 active funds, 363 invest only in the U.S., 122 invest only outside the U.S. and 48 invest globally. Vehicles are considered active if they are still raising capital or have already held final closes but have invested less than 75% of their equity.

That means a rotating group of funds is counted each year. Most of the departing funds were removed because they sur- passed the 75% threshold, but five were dropped because they were put on hold or canceled. Overall, 186 vehicles were added to the list and 181 were removed.

Vehicles must be seeking to raise or have closed on at least $50 million of discretionary equity. Excluded are joint ventures, separate accounts, nontraded REITs and club funds (typically with fewer than a half-dozen limited partners).