The debate over the viability of the classic 60/40 model investment portfolio always picks up steam during turbulent economic environments. But both research and historical returns have clearly shown that increasing asset diversification in a given portfolio—for example, by including private market investments or so-called alternative investments—tends to improve its risk/return characteristics over time. In addition, some private real estate assets have exhibited a tendency to help mitigate the impact of inflation because property owners have the ability to adjust rent prices upwards.
Potential to Improve the Odds of Success
The chart below, sourced from Yahoo Finance, shows the performance of three illustrative portfolios with different exposures to private real estate between October 2003 and April 2022. According to the model, including an allocation to private real estate can reduce the portfolio’s overall volatility while potentially improving overall returns.
The three examples provided are intended to illustrate the effects of adding varying amounts of private real estate to an investor’s portfolio. These models are for illustrative purposes only and do not represent actual investors or investments. According to the sample charts, Model A is the classic 60/40 portfolio with zero exposure to private real estate. Model B shows a 10% private real estate position, with 55% in stocks and 35% in bonds. Model C puts 20% in private real estate, 50% in stocks, and 30% in bonds.
Diversifying existing real estate holdings by including growth-focused strategies with the potential to offer enhanced returns can help advisors fine-tune their clients’ portfolios to fit individual risk tolerances and investment objectives.
Private commercial real estate has become an increasingly important allocation for some sophisticated institutional investors, helping them complement their Core, Core-Plus real estate holdings with growth-oriented Value-Add and Opportunistic strategies, according to the Hodes Weill & Associates 2021 Institutional Real Estate Allocations Monitor report. And, while individual investors have historically accessed commercial real estate primarily through publicly traded REITs and other income-focused funds that invest exclusively in Core and Core-Plus properties, they are also beginning to look for access to private funds, turning to their financial advisors for help or deciding to go it alone.
Where to Start?
There are two primary challenges investors and their advisors face when looking to invest in private commercial real estate through a professionally-managed fund structure.
Historically, private commercial real estate funds have been created for ultra high net worth investors, endowments, and other institutional investors. These funds are typically not structured with smaller investors in mind and often have high investment minimums $5M – $10M+.
Additionally, finding quality fund managers typically requires having a broad network and investment expertise in the asset class, as well as dedicated resources and a rigorous process for conducting due diligence.
However, today there are funds, like those managed by CrowdStreet Advisors, that are structured with smaller investors in mind while not compromising on investment expertise and due diligence procedures.
For advisors looking to improve risk/return profiles, private commercial real estate may be a viable consideration. And now it has finally become more accessible.
 Baird Private Wealth Management, http://www.bairdfinancialadvisor.com/schmidtvanderleestwenzelgroup/mediahandler/media/163794/The_role_of_alternative_invst.pdf
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