Direct participation in commercial real estate (CRE) – private investment via pass-through vehicles, in contrary to publicly traded REITs – has long been an important asset class for the majority of bigger portfolios. Online exchanges such as RealtyShares have also made CRE open to approved buyers in general.
These investments provide meaningful diversification to a portfolio. The Yale Endowment, for example, states in its 2016 study that the permanent income flow of real estate with equity upside provides a perfect buffer against unanticipated inflation without losing the projected return.
Private interest in commercial real estate is a special asset class – one that operates and performs differently than many other investment classes, such as securities or bonds.
Cash flow. Investments may bring current income and appreciation (value changes). An important feature of CRE is that a significant portion of total investment return is derived from income flows (the pass-through of current profits from rentals, etc.), as opposed to price appreciation. This revenue aspect may have a degree of security during times of turmoil in capital markets, and real estate may vary substantially from other investment assets in this regard.
Low volatility. The sales aspect of commercial real estate often typically tends to mitigate the volatility relative to asset classes such as bonds, where price fluctuations make up a greater portion of the average rate of return.
Real estate is a hard asset. Real estate is a “hard” commodity with a real value. Not only do the buildings have value, so does the property itself. Well-chosen properties can provide some security that some value will be retained even if the property does not reach its full potential.
Potential hedge against inflation. As prices of goods and services increase in the wider economy, real estate can benefit, as rising wages and profits generally increase the amount that tenants are willing to pay for space. Such same reasons often lead to increasing building costs, with the effect that replacement rates continue to increase – pushing up current commercial real estate prices as well. In addition to organic rental development, leasing clauses in many leases may also include inflation hedges.
Diversification. Industrial real estate gives you two options to diversify your property portfolio:
Return correlations between commercial real estate and other asset classes have traditionally been weak. A decline in the stock market does not automatically equate with a downturn in real estate. Commercial real estate is a longer-term asset; lengthy contract periods, vulnerability to construction events, and other factors give commercial real estate a significant opportunity to lessen portfolio volatility by diversification.