Approaching the halfway mark of 2011, institutional investors have increased their appetite for commercial real estate, overtaking publicly traded REITs as the leading purchasers of retail and office properties in the first quarter of 2011.

Institutions pumped nearly $14 billion into the retail sector from January through April of this year, according to Real Capital Analytics (RCA). That compares to just $3.2 billion invested in retail properties for all of 2010.

Institutional investors grew their share of the single-tenant retail market from 5% for all of 2010 to 25% in the first four months of 2011. Their acquisitions totaled $427 million during those four months compared with $161 million for all of last year.

Why are institutional buyers and REITs much more intent on owning single-tenant retail properties than they were a year ago?

“There have been more portfolios trading,” says Bob White, president of RCA. Institutional investors typically aren't interested in smaller-dollar transactions, such as single-tenant retail.

However, White notes that yields in the single-tenant retail sector today are higher than those for the office and apartment sectors. Cap rates for single-tenant retail averaged 7.66% for the first quarter of 2011 compared with 7.4% for office and 6.67% for apartments.

When it comes to attracting institutional capital, the retail sector has not been alone, as office buildings have also garnered significant attention.

Institutional investors overtook REITs as the largest acquirers of U.S. office buildings in the first quarter, a sign of growing demand that may lead to higher prices, reports the CoStar Group.

In fact, institutions were larger purchasers of office buildings than REITs in three of four quarters last year, says Christopher Macke, senior real estate strategist at CoStar in Washington, D.C.

He notes that institutional demand for commercial real estate is on the rise due to the improving economy and relatively low yields being generated in alternative asset classes.

Pension funds, insurers and sovereign wealth funds added $1.39 billion of office buildings to their portfolios in the first quarter of 2011, according to CoStar.

Acquisitions of office properties by REITs totaled $1.1 billion during the same period. That represents a major turnaround from a year ago when institutions were net sellers, notes Macke.

CoStar reports that investment-grade commercial property prices rose 2.2% in March 2011 from a year ago. Meanwhile, office sales more than doubled to $10.2 billion in the first quarter compared with a year ago, according to RCA.