Alternative Allocations: Opportunities in Commercial Real Estate
While the financial media has focused on the headwinds for commercial real estate and the challenges the office and retail sectors face, this narrative ignores the differences across sectors and the potential opportunities available in today’s market environment, according to Franklin Templeton Institute’s Tony Davidow.
Based on its historical growth and income characteristics, commercial real estate (private real estate) represents a significant allocation for many institutions and family offices. According to the 2022 Institutional Real Estate Monitor,1 real estate represents an 11% global allocation in institutional portfolios, and according to the UBS Global Family Office Report,2 real estate represents a 13% allocation in family office portfolios. In recent years, private real estate has been more accessible to high-net-worth investors due to product innovation, as well as the willingness of institutional-quality managers to bring products to the market.
Last year, we were reminded of the limitations of the 60/40 portfolio3 and the need for an expanded toolbox to meet client goals. Consequently, advisors and investors have sought alternative sources of growth and income and an effective way to dampen volatility and hedge inflation. As the data below illustrate, real estate has historically delivered attractive risk-adjusted returns relative to stocks, bonds, and publicly traded real estate investment trusts (REITs).
Private real estate has historically delivered higher income than most traditional fixed-income options4 and publicly traded REITs. Private real estate managers also can increase rents in rising inflationary environments.
The current market environment
After interest rates rose dramatically throughout 2022 and the early part of 2023, some have suggested that this would provide headwinds for real estate. Coupled with the tighter credit conditions in the post-Silicon Valley Bank (SVB) environment, and the fact that office and retail sectors were still struggling with occupancy levels, there were concerns about risks across the overall private real estate market.