Private real estate 101
Key Takeaways
CRE
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, and encompass a range of investment strategies. The primary commercial real estate sectors tracked by public and private indices include residential rental, industrial, office, retail, and hospitality.
Primary Strategies
Primary CRE strategies vary based on differing levels of risk and return potential. The primary investment strategies that increase the level of risk are with core, core plus, value-added, and lastly opportunistic. Generally, higher expectations of risk are associated with higher expectations for potential returns.
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 individual 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 $20.7 trillion.i
Commercial Real Estate Ranks as the Third Largest Asset Class in the US ii
Major CRE Sectors
Rental residential broadly includes any form of housing that is not owner-occupied, including apartments, single-family rentals, seniors housing, and student housing.
Office buildings house firms and workers who are primarily engaged in services activities, such as administration, management, finance, and information.
Hospitality refers to the hotels, resorts, and similar locations that offer overnight lodging.
Industrial encompasses manufacturing facilities as well as warehouses and distribution centers that store physical goods.
Retail refers to stores, which could take various formats, such as malls, neighborhood shopping centers, restaurants, and convenience stores.
Primary CRE Investment Strategies
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Core is defined by a low-risk/low-return approach. Buildings are newer and well-occupied, while loan amounts are lower. Cash flow tends to be more predictable, but upside may be limited.
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Core Plus assets are one step up from core in the risk/return profile because of an added element of risk requiring more active management. Properties may require light capital improvements and have higher leverage applied than core properties.
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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.
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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 is Heavily Concentrated in Value-Added and Opportunistic Strategies iv
Private CRE as an Asset Class
Private CRE Has Recorded Low Correlations with Stocks and Bonds Since 2000 vi
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 real estate has an established track record of delivering investment returns through business cycles as highlighted below.
Private CRE has Delivered Healthy Annual Returns over the Past 15 Years vii
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