The Importance of Real Estate in a Well Balanced Investment Portfolio

For decades, investors have relied on a combination of stocks and bonds to build diversified portfolios. While this traditional approach remains foundational, many investment advisors also include alternative investments to further diversify beyond stocks and bonds. The pool of alternative investment options is large, but one key component for many is private commercial real estate (“CRE”). Investments in private CRE can play an important role to help achieve long term portfolio balance.

Stocks and bonds are traded daily in public markets and are highly sensitive to changes in interest rates, inflation expectations, and investor sentiment. Private CRE, by contrast, tends to move slower. Valuations are not set daily (often monthly or quarterly) with property cash flows determined by longer term lease structures and local supply and demand dynamics. With the drivers of investment returns being notably different, real estate has historically exhibited lower correlation with both stocks and bonds.
Real estate also offers inflation mitigation benefits that traditional assets may lack, which has taken on an increased importance in recent years. Inflation can erode the purchasing power of bond income and pressure equity valuations through rising costs and higher discount rates. In contrast, real estate can benefit from inflation through rent increases that outpace expense growth and property appreciation.

Any potential private CRE investor will undoubtably want to understand private CRE returns. While each investment is different, one useful index is the Open-End Diversified Core Equity fund (ODCE), which is tracked by the National Council of Real Estate Investment Fiduciaries. The ODCE fund is often utilized as an institutional real estate performance benchmark. Since 2000, the ODCE index has averaged a 7.6% return and has been negative only four years. Over the 48-year history of the index, the average return is 9.5% with just six negative years.
Choosing a private CRE investment can be difficult. Asset type and location can have an impact on investment performance with winners and losers changing over time. Multifamily properties struggled in the lead up to the Great Recession but have performed very well in the past 10+ years. The impact of e-commerce and Covid battered retail properties, but well-located retail centers are fully occupied and thriving today. CRE is always about supply and demand. Investing with someone who understands supply and demand dynamics within markets they operate will generally yield superior results.

What is the most important consideration when looking for a private CRE investment? Many investment veterans would say to focus on the operator. Start with proven operators who are trustworthy and have a strong track record managing through difficult business cycles. Investors can look to find multiple operators to build out a diversified private CRE pool of investments or find a firm like Investors Associated, which offers a diversified fund with multiple property types over seven states. We have been providing a diversified private CRE investment option to investors for nearly 20 years. To learn more, contact Kate Hogan, Director of Investor Relations at khogan@iallp.com or 414-260-9472.