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Why do leading institutions utilize Private Real Estate and Multifamily Investments to enhance their risk/return profile? (Part 1)

Written by Joe Hart | Jun 14, 2022 2:31:45 PM

Why do institutional investors like large pensions and why do university endowments tend to outperform individual investors?  

Large pensions and endowments have long advocated for owning alternative strategies—like private real estate—in their investment portfolios. Effective asset allocation is a strong driver of performance and risk management for these institutional investors. In addition, the diversification benefit of allocating capital to private real estate is a key reason this alternative asset class is so highly regarded.

Institutions commonly look to private real estate as an investment to contribute a balance of returns (through property price appreciation) and income (through tenant rent payments), which can help enhance a portfolio's risk-return profile. Many of these institutions are open to holding a significant percentage of portfolio assets in private real estate, as illustrated by Rice University, allocating nearly 14% of its $8.1 billion endowment to commercial real estate property.1

Favorable Outlook 

As reported by NAREIT, an industry organization representing the REIT sector of Commercial Real Estate (CRE), 2021 was a record year for many industry sectors, and 2022 appears to be well-positioned for similar growth.2

According to a recent outlook from private capital advisory firm Park Madison Partners, overall institutional allocations are expected to increase this year.3

“Given real estate’s diversification benefits, stable income stream, and strong return potential, we expect average institutional investor allocations will approach 11% in 2022.” - Park Madison Partners

 

The advisory firm highlights what it believes are the factors that will continue to drive growth in the private real estate industry.3

  • Strong performance and bullish sentiment
  • Low correlations to other asset classes
  • High levels of current income in a low-interest-rate environment
  • The asset class as a potential inflation hedge
  • Capital market appetite for stabilized core assets 

These forecasted characteristics are why many institutional investors will continue to use private real estate to enhance their investment portfolio’s risk-return profile. 

Favorable Sectors

The private Commercial Real Estate market is a vast and essential segment of the U.S. economy. The industry is projected to generate $1.1 trillion4 in revenue in 2022. Institutional investors have access to a wide range of property types, as illustrated by industry research firm Mountain Dell in its 2021 year-end summary report.5

U.S. Securitized Private Real Estate

Sales by Asset Type 2021

 

The multifamily sector represented nearly 50% of overall securitized private real estate sales last year. There are many reasons why multifamily properties have been preferred among institutional investors over time and why this industry sector is well-positioned to outperform other real estate asset classes in 2022 and beyond. 

Our next post will examine the factors driving the growth of multifamily investments. Finally, we will highlight how you can potentially benefit by investing in this private real estate sector.

In the interim, download our FREE ebook, A Potential Inflation Hedge for Today: Private Multifamily Real Estate.

You can also conveniently schedule a one-on-one meeting with me HERE.

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1  https://www.perenews.com/why-rices-endowment-likes-being-overweighted-to-real-estate/  

2  https://www.reit.com/news/blog/market-commentary/top-10-things-watch-commercial-real-estate-2022 

3  https://www.perenews.com/look-ahead-2022-five-reasons-real-estate-allocations-will-rise-next-year/ 

4  https://www.ibisworld.com/industry-statistics/market-size/commercial-real-estate-united-states/

5  https://12exx71wc3m46es1m3w8fvx1-wpengine.netdna-ssl.com/wp-content/uploads/2022/01/1031-Exchange-2021-EOY-Report-by-Mountain-Dell-Consulting.pdf  

https://hudsonpoint.com/learning-center/blog/why-you-should-consider-real-estate-as-an-alternative-investment/

https://mf.freddiemac.com/docs/mf_securitization_investor-presentation.pdf

https://www.cbre.us/-/media/cbre/countryunitedstates/media/files/services/multifamily/cbre-us-multifamily-primer-for-offshore-investors.pdf