Private real estate 101

Key Takeaways

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Commercial Real Estate

Commercial Real Estate (CRE) refers to properties used for business-related purposes that are owned by individuals, institutions, and investment managers, which are generally income-generating, include a wide range of asset types. The primary commercial real estate sectors tracked by public and private indices include residential rental, industrial, office, retail, and hospitality.

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Primary Strategies

Primary CRE strategies vary based on differing levels of risk and return potential. The primary investment strategies are core, core plus, value-added, and opportunistic. Generally, higher expectations of risk are associated with higher expectations for potential returns.

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Main Drivers

Private CRE and public CRE represent two distinct ways of investing in the commercial real estate market. The choice between private and public CRE depends on investor preferences, liquidity needs, risk tolerance, and investment goals.

What is commercial real estate?

Commercial real estate, or CRE, refers to properties used for business-related purposes that can generate rental income and offer potential upside to investors through capital appreciation. These can include both places of business, such as warehouses, office buildings, and stores, as well as living spaces.

CRE ranks as one of the largest asset classes in the US, with an estimated total value of $21.6 trillion.ⁱ

Commercial Real Estate Ranks as the Third Largest Asset Class in the USⁱⁱ

Major CRE Sectors

Rental residential broadly includes any form of housing that is not owner-occupied, including apartments, low-density, and single-family rentals, Seniors housing, and student housing.

Industrial encompasses manufacturing facilities as well as warehouses and distribution centers that store physical goods.

Office buildings house firms and workers who are primarily engaged in services activities, such as administration, management, finance, and information.

Retail refers to physical (or “brick and mortar”) stores, which could take various formats, such as malls, neighborhood shopping centers, restaurants, and convenience stores.

Hospitality refers to the hotels, resorts, and similar locations that offer overnight lodging.

Primary CRE Investment Strategies

Core is defined by a low-risk/low-return approach. Buildings and facilities typically are newer and well-occupied, while loan amounts are lower. Cash flow tends to be more predictable, but upside may be limited.
Core Plus assets are one step up from core in the risk/return profile because of an added unit of risk requiring more active management. Properties may require light capital improvements and typically have higher leverage applied than core properties.
Value-Added properties provide opportunities to increase revenue and/or values through moderate renovations, repositioning, or adding new tenants. Properties are typically older in age and may have deferred maintenance needs in addition. These and similar business plans require specific expertise and involve a degree of uncertainty.
Opportunistic strategies tolerate the greatest amount of risk in search of the highest returns. New construction and major redevelopment are the most common examples.

Private CRE Fundraising Over the Past Five Years Was Heavily Concentrated in Value-Added and Opportunistic Strategiesⁱⁱⁱ

Private CRE as an Asset Class

Private real estate has an established track record of delivering investment returns through business cycles as highlighted below.

Private CRE Has Recorded Low Correlations with Stocks and Bonds Since 2000^iv

	Private CRE	Public CRE	Stocks
Public CRE	0.18
Stocks	0.04	0.70
Bonds	-0.14	0.24	-0.09

CRE managed by private investment managers provides investors with exposure to real assets, typically compiled in a fund or a private REIT that own or intend to acquire large portfolios of single-sector or diversified property types. Investment managers specialize in real estate management and oversee day-to-day asset management on behalf of their investors.

Public CRE investment vehicles are traded on stock exchanges and offer liquidity just as any other publicly traded security. Investors may note that Public CRE securities can be influenced by swings in broader market sentiment. In Private CRE, there are typically longer-duration commitment periods, and investors may expect higher potential returns as a ‘liquidity premium’ as a trade-off for liquidity.

Private CRE is the dominant form of investment in real assets as Public CRE accounts for less than 10% of the CRE transaction market.^v

Private CRE has Delivered Healthy Annual Returns over the Past 15 Years^vi

Explore Private Markets Further

Explore select private market asset classes to understand better what they are, who uses them, and the potential to identify value.

Private Equity

Explore Private Real Estate Asset Classes

Explore select private market asset classes to understand better what they are, who uses them, and the potential to identify value.

Private debt

Industrial Net Lease

LOGISTICS

Build-to-Rent

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i US Census Bureau, American Community Survey 1-Yr. Estimate, 2022.
ii Low-Income Housing Tax Credits (LIHTC) are a federal program that incentivizes private developers to create or rehabilitate affordable rental housing for low-income households by providing them with tax credits.
iii Section 8 is a federal housing assistance program that provides rental subsidies to low-income households, either through vouchers or project-based assistance.
iv AMI determines the thresholds for eligibility to receive housing assistance and can vary widely by market.
v US Census Bureau, American Community Survey 1-Yr. Estimate, 2010-2022.
vi RealPage, as of Q2 2024.
vii US Census Bureau and the Department of Housing and Urban Development (“HUD”), 2021 American Housing Survey: Housing Costs - Renter-occupied Units (created by the AHS Table Creator).
viii US Census Bureau and the Department of Housing and Urban Development (“HUD”), 2021 American Housing Survey: Housing Costs - Renter-occupied Units (created by the AHS Table Creator).
ix US Census Bureau and the Department of Housing and Urban Development (“HUD”), 2021 American Housing Survey: Housing Costs - Renter-occupied Units (created by the AHS Table Creator).
x US Census Bureau & Department of Housing & Urban Development, American Housing Survey, 2021.
xi National Housing Preservation Database, Picture of Preservation, 2021.
xii National Housing Preservation Database, Picture of Preservation, 2021.
xiii CoStar, as of Q2 2024.
xiv CoStar, as of Q2 2024.
xv Engineering News-Record via Moody’s Analytics, Baseline Scenario, as of Q2 2024.
xvi Center on Budget and Policy Priorities, Low-Income Housing Tax Credit Could Do More to Expand Opportunity for Poor Families, 28 August 2018.
xvii Engineering News-Record via Moody’s Analytics, Baseline Scenario, as of Q2 2024.

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