The New Real Estate Playbook
Introduction
The commercial real estate market is not as large as the global equity or bond market, but it is still a huge and diverse market. Additionally, if agricultural land, infrastructure, and other “real asset” categories are included, the total size does approximate the bond and stock markets in value. As such, many investors include this as part of their long-term investment strategy. But investors are sometimes frustrated as the ability to invest is complicated by the structures and product types that are often more complex than traditional stocks and bonds.
Recent indications from large investors and family offices show that, though selective, many are increasing allocations to private markets and especially real asset segments1. These investors often cite concerns over stock valuations, inflation, and declines in the dollar as reasons for the increased exposures. Given the increased interest, we wanted to provide some clarity on the various ways investors can add real assets to their portfolio.
Ways to invest in real asset markets.
Liquid options – The most liquid investments are hybrid investments. Market-traded securities that are supported by real estate or real estate businesses. Real estate investment trusts (REITs) are the largest category of this type. Globally, there are 1,000 of these securities, with more than two hundred in the U.S. alone. REITs began in the 1960s, though it was the Tax Reform Act of 1986 that made them more popular in the U.S. Since the 1990s, the industry has matured and gathered significant assets. Presently, publicly traded REITs in the U.S. own approximately $2.5 trillion in real estate across all major categories. The Tax Code contains certain requirements for REITs, including the distribution of 90% of underlying income. As one might expect, all REITs are not the same: risk and return can be driven by asset-class and management team execution around leverage and financing strategies as well as buy-and-sell decisions related to the underlying assets, among other attributes.
The second major category of liquid real estate is a diverse group often called real estate operating companies (REOCs). These are traditional public companies that are heavily influenced by real estate fundamentals due to their business models. These can include development, real estate services, and builders. Though these companies are economically tied to the real estate market, the level of execution risk can cause them to deviate significantly from underlying real estate trends.
Finally, as with other asset classes, there are hundreds of choices for investors to own a bundle of these companies in broad, or specific categories through active and passive mutual funds, and various index-based exchange traded funds (ETFs).
Semi-liquid options – Recent years have shown an increase in structures that allow investors to gain access to illiquid assets, with periodic liquidity from the product construction. One such structure is the interval fund. Interval funds are like traditional mutual funds, but rather than trade daily, they have less frequent trading windows, often quarterly (i.e., “intervals”). These funds allow investors to gain access to large pools of real estate, managed by professional teams; simplified tax administration, as they are reported on a 1099 vs. K-1s, and in most market environments offer the periodic liquidity feature. In contrast with these benefits, the expenses can be higher than public securities, and this liquidity feature is subject to the behavior of the other fund investors, as most cap quarterly withdrawals at 5%, though this figure can vary.
There are other options that offer even less liquidity but still provide for professional management and pooled purchases of assets. Private REITs operate like public REITs or interval funds but have no formal liquidity options. Similarly, Tenancy in Common (TIC) Funds do not have specific liquidity features but can allow investors to utilize professional management and, possibly, defer gains via a 1031 exchange feature.
Non-liquid options – For investors that have the capacity to take on full illiquidity, the private real estate market operates like those in private equity or credit. These are pooled partnerships, managed by professional managers that often target specific or niche strategies. The primary constraints on these products are that investors often need to meet various income or net-worth hurdles, and tax administration can be more complex.
Future structures – The emergence of blockchain technology is ushering in a potential new structure that may solve some of the challenges of the above product types. Through this technology, tangible assets can be tokenized and traded, via blockchain ledgers – often at lower costs and minimums as well as with higher levels of liquidity. As we speak, this structure is making its way through the regulatory world, and we would anticipate it moving into the mainstream over the coming years. The possibilities of this innovation may be transformational, allowing investors to access assets previously unavailable to the broader public. Some experts even forecast the market for tokenized real estate could grow to more than $3 trillion over the next five years.2
Conclusions
One of the trade-offs that comes from the spectrum of varying liquidity is the price volatility of the security, which represents the underlying real estate assets. The function of markets can explain this: the more frequent the quotation of value assigned by markets, the more opportunities investors have to apply their collective opinions of a changing macro landscape. For real estate investors, this means that if you properly align your personal goals with the type of liquidity structure you invest in, you might be able to smooth out the ups and downs of markets as you allocate capital to real estate. Our objective with this paper is to introduce the reader to many of the ways to access the broad real estate asset class. However, any decisions about investing should be made in conjunction with professional financial and tax advisors to ensure they align with your goals. We would be happy to discuss any of the issues raised in this paper with you, which you can do by responding to our team.
Note 1. https://www.landhub.com/land-news/the-2026-land-investment-outlook-expert-predictions
