From land to buildings and homes, real estate as a concept is familiar to us all. But private real estate is different, in a few important ways. Institutional investors have long allocated to this asset class as a core portfolio component due to its potential to generate income or capital appreciation—and oftentimes both. Historically, individual investors have had limited access beyond homeownership or investment properties. That is changing, as new structures and vehicles have expanded access to this large and globally diverse asset class.
Key Takeaways: Why Private Real Estate?
ATTRACTIVE RETURN POTENTIAL
Income is generated as properties produce cash flows from rents and potential long-term appreciation of assets may also be passed through to investors.
SCALE AND MARKET DEPTH
As one of the largest asset classes, commercial real estate presents a deep global opportunity set across risk profiles.
DIVERSIFICATION POTENTIAL
Private real estate has historically exhibited low correlation to stocks and bonds, driven by fundamentals like rental demand, lease structures, and local market dynamics instead of equity market sentiment.
INFLATION HEDGING
Many real estate leases include reset on a periodic basis and may also include fixed annual percentage increases for multi-year leases. At the same time, the values of buildings can change as construction costs evolve – materials, labor, etc.—allowing rental income and property values to rise alongside broader price levels and providing a natural hedge against inflation.
Commercial Real Estate At A Glance
Commercial real estate refers to properties that are used for non-residential or investment purposes, and may either encompass an equity ownership stake or the debt that finances the property. Private real estate can be held directly (i.e., owning a building), or through an investment fund that does not trade on a public exchange.
Size of the Market
The U.S. commercial real estate market is roughly $21 trillion—the third-largest in the U.S., trailing only public equities and the Treasury market. Of that, more than 90% of is privately owned, which makes the private opportunity set several times larger than its public counterpart.
Exhibit 1: Commercial Real Estate is the 3rd Largest Asset Class in the U.S.
Property Types
| PROPERTY TYPE | DESCRIPTION | KEY CHARACTERISTICS |
|---|---|---|
| Residential | Apartments, single-family rentals, student/senior housing | Shorter lease terms, regular rent resets; essential housing demand |
| Industrial | Warehouses, distribution centers, manufacturing | E-commerce and/or supply-chain driven, multi-year leases; triple-net leases |
| Office | Corporate buildings, professional office space | Quality and location critical, multi-tenant or single-tenant/specialized; flight to quality trend |
| Retail | Shopping centers, grocery-anchored plazas | Necessity-based retail more resilient, location-dependent |
| Hospitality | Hotels, resorts, short-term lodging | Occupancy and rate sensitive; tied to travel demand (leisure and business-related) |
| Specialized/Other | Data centers, self-storage, healthcare/medical office, life science | Sector-specific trends; often require specialized expertise |
The Tangible Economy
Private real estate is an investment in the tangible economy — the physical spaces that support day-to-day life. Investors participate in the cash flows generated by the places where people live, work, and shop.
Where we live
Multifamily apartments, single-family rental homes, student housing, and senior living. As the costs of homeownership rise and preferences evolve, these assets provide essential housing and may also offer other amenities and services, providing durable, recurring income.
How we buy
Last-mile logistics centers, distribution hubs, and grocery-anchored retail plazas. These assets power modern supply chains and are benefiting from secular trends like e-commerce growth, onshoring, and nearshoring of manufacturing and distribution networks and experiential/necessity-oriented retail.
How we experience
Hospitality assets, including luxury resorts and select-service hotels that cater to travel demand and experience-driven consumer spending.
Where we work
High-quality office buildings in prime locations. The current office market is experiencing a flight to quality, where newer, amenitized buildings are gaining market share and seeing rent growth while older assets face obsolescence.
Exhibit 2: The Tangible Economy: Private Real Estate Across Everyday Life
Debt vs. Equity In Private Real Estate
There are two broad categories of real estate investments, each of which serves a specific purpose in a portfolio.
What Is Private Real Estate Equity?
Equity in real estate refers to direct or indirect ownership of properties. Typically, the equity holder, also called the ‘Sponsor’, controls the asset, making key decisions related to the operations, property management, leasing, etc.
Equity returns from properties are driven in two ways: rental income and any appreciation in property value over time.
These returns can be amplified over time by active management: renovating buildings, improving operations, signing quality tenants, and potentially timing exits strategically.
The value of an equity interest represents the value of the property minus outstanding debt, such as a mortgage. Equity investors sit at the bottom of the capital stack, meaning they absorb losses first in a downturn but also capture the upside if properties perform well (See Exhibit 3).
What Is Private Real Estate Debt, or Credit?
Real estate lending or credit investments involve lending capital to property owners. The loans are typically secured by the properties themselves. Real estate debt is often likened to mortgage loans that many individuals and households may obtain to help purchase a home. Debt capital may be used to help fund purchases, finance new development, or allow existing owners to refinance assets. Lenders, and by extension, investors in real estate credit, receive periodic interest payments and expect to receive principal repayment, or the amount they’ve lent to the sponsor, at the loan’s maturity.
Real estate credit sits higher in the capital stack than equity, offering more downside protection but capped upside. Credit investors are generally paid before equity holders and have a contractual claim on the property if the borrower defaults.
Capital Stack: Bringing It All Together
The capital stack helps illustrate how both equity and credit factor into the total value of a property.
Both credit and equity capital are often necessary to acquire and own commercial real estate property, similar to a home purchase. Each layer of the stack represents a different position in the property's financing structure, with distinct risk and return characteristics.
Exhibit 3: A Familiar Structure: The Real Estate Capital Stack
How Do Equity and Credit Respond in Different Market Environments?
Fluctuating property values affect equity and debtholders differently. Debtholders typically have more certainty and downside protection, while equity holders capture volatility in both directions.
Exhibit 4 illustrates this dynamic with a property initially valued at $100—financed with $60 in debt and $40 in equity.
If property values rise 20% to $120, debt remains fixed at $60, but equity grows 50% from $40 to $60. Equity holds capture all the appreciation.
If property values fall 20% to $80, debt remains fixed at $60, but equity drops 50% from $40 to $20. Equity holders absorb all the loss.
This asymmetry explains why equity strategies target higher returns than credit and why many real estate investors blend both to balance income stability with growth potential. Senior lenders receive consistent interest payments regardless of property appreciation, while equity investors participate in both upside and downside.
Exhibit 4: The Asymmetric Impact of Property Value Changes
Property Classes
Real estate properties are categorized by “class,” which is shorthand for the combination of a property’s age, factoring in any renovations or improvements, location, and income profile.
Class A properties represent the highest quality in excellent locations with the lowest risk, while Class C properties are older, lower-quality assets, often in less desirable locations. Some Class C properties can be successfully repositioned for higher returns, but many are functionally obsolete or face market challenges that make them challenging for material improvement. Class B properties sit in the middle and are usually functional but may be dated and less suited for modern tenants without capital improvements.
| PROPERTY CLASS | DESCRIPTION | TYPICAL CHARACTERISTICS | RISK / RETURN PROFILE |
|---|---|---|---|
| Class A | High-quality properties in prime locations | New construction or recently renovated; top-tier amenities; strong tenant demand; high occupancy; premium rents | Lower risk; stable income; premium pricing |
| Class B | Middle-quality assets, generally older but functional | Usable space; may require upgrades; often targeted for value-add improvements | Moderate risk; potential for income growth through renovations |
| Class C | Older properties in less desirable locations | Significant capital investment often required; operational or physical challenges including potential obsolescence | Higher risk; higher income or turnaround potential |
Private Real Estate Risk Profile
RInvestment strategies map closely to property classes. Core strategies focus on Class A assets for stable income. Value-add strategies target Class B properties for renovation and repositioning. Opportunistic strategies may involve targeting Class C assets for significant improvements or new development.
| STRATEGY | DESCRIPTION | RISK LEVEL | EXAMPLE |
|---|---|---|---|
| Core | High-quality, well-occupied properties in diversified metro areas; focus on stable income, low leverage, minimal repositioning | Low | Newly-built, highly-leased luxury multifamily building in a major urban market |
| Core-Plus | High-quality, well-occupied properties with potential for light improvements to increase cash flow or Class A properties with more leverage | Low to Moderate | 90% occupied multifamily community |
| Value Add | Properties requiring renovations or repositioning to increase cash flow and value; active management strategy; moderate leverage | Moderate | 1990s–2000s-vintage apartment building needing renovations and operational improvements |
| Opportunistic | Ground-up development, major redevelopment, or significant repositioning; may involve substantial lease-up risk; higher leverage | High | Ground-up multifamily development or major office-to-apartment conversion |
| Credit | Real estate-backed lending; focus on loan structure, borrower quality, and property fundamentals | Varies depending on leverage level (LTV), asset type and business plan | Senior mortgage loan on a multifamily property |
Private vs. Public Real Estate
Public and private real estate both provide exposure to income-generating commercial properties, but differ significantly in how they're accessed, priced, and held. Public real estate — accessed primarily through real estate investment trusts (REITs) — trades on exchanges at a share price like stocks, offering daily liquidity but exposing investors to market volatility. Private real estate investments can be direct holdings of individual properties or funds managed by an institutional manager. Private real estate transacts at net asset value, with more limited liquidity but historically lower correlation to financial markets like stocks and bonds.
REITs Explained
A REIT is a company that owns, operates, or finances income-producing real estate. REITs allow investors to pool capital and invest in portfolios of properties (e.g., apartment buildings, shopping centers, office towers, or warehouses) while entrusting an experienced manager to manage the properties.
To qualify as a REIT under IRS regulations, a company must:
- Invest at least 75% of total assets in real estate
- Derive at least 75% of gross income from real estate-related sources (rents, mortgage interest, property sales)
- Distribute at least 90% of taxable income annually to shareholders as dividends
This mandatory distribution requirement makes REITs attractive for income-focused investors.
| CHARACTERISTICS | PUBLIC REAL ESTATE | PRIVATE REAL ESTATE |
|---|---|---|
| Transaction Pricing | • Share price determined by daily stock market trading • May trade at significant premiums or discounts to underlying NAV based on property valuations | • Valued and transacts at NAV based on periodic property valuations • Directly reflects underlying property values |
| Access | • Purchased through brokerage accounts on public exchanges • Available to all investors | • Invested directly with fund managers or through intermediaries • Minimum investments and qualification requirements vary by vehicle |
| Diversification | • Higher correlation to equity markets (stock price volatility) • Returns influenced by both property fundamentals and market sentiment | • Low correlation to stocks and bonds • Returns primarily driven by property-level fundamentals (rental income, occupancy, local market dynamics) |
| Volatility | • Subject to daily equity market volatility • Prices can fluctuate significantly and quickly based on investor sentiment or broader market movements, including interest rate changes | • Lower reported volatility due to appraisal-based valuations • Values change more gradually based on property performance and market conditions, including interest rate changes |
| Liquidity | • Daily liquidity via stock exchanges at share prices • Shares can be sold immediately, though potentially at prices disconnected from underlying property NAV | • Liquidity dependent upon asset sales or limited, periodic redemption windows; at NAV • Generally considered illiquid with capital invested for extended periods |
Why Invest in Private Real Estate?
Private real estate has historically offered attributes that can enhance portfolio outcomes, particularly for long-term, patient capital.
1. Market Scale and Depth
Over the past two decades, equity fund managers have tended to allocate less than 5% to private real estate.1 As a result, this $21 trillion asset class remains significantly underrepresented in individual investor portfolios. This disparity stems largely from historically higher barriers to entry in private real estate.
Over the last decade, this has changed as new private real estate investment structures and expanded product offerings have increased. Today, individual investors can access professionally-managed opportunities, spanning, industrial, multifamily, retail, office and specialized sectors across hundreds of thousands of markets — including individual properties or portfolios, large or small assets, and serving tenants from households to Fortune 500 companies.
2. Diversification Beyond Stocks and Bonds
Real estate returns are driven by different factors than those of public equities or fixed income. Specifically, real estate investment performance is influenced by rental demand, lease structures, property management, and local market supply-and-demand dynamics. Real estate can be thought of as a derivative of the broader economy, allowing investors to gain exposure to trends such as demographic shifts and population aging, migration, trends that shape how corporations use space, including e-commerce, remote, hybrid and in-office work, and supply chain resilience. Importantly, as tangible assets, real estate values are much better insulated from short-term shifts driven by market sentiment and trading, allowing private real estate to serve as a volatility dampener. In fact, over the past 20 years, private real estate has shown near-zero correlation to global equities and global corporate bonds.2
A thematic private real estate strategy that includes real estate credit and equity has shown low correlation to stocks and bonds.
Exhibit 5: A Historical Portfolio Diversifier: Private Real Estate Correlation to Traditional Assets
3. Inflation-Resilient Income
Private real estate can protect investor portfolios against adverse impacts from inflation in a few key ways. Real estate cash flows change through new leases and annual rent increases. Residential properties typically use one-year leases, allowing Sponsors to adjust rents with supply, demand, and operating costs—often keeping pace with or exceeding inflation. Commercial properties such as industrial, office or certain retail assets, often use multi-year, triple-net leases, where tenants cover certain operating costs. These leases typically include fixed or, in rare cases, inflation-linked, rent increases, enabling real rent growth, insulating owners from cost inflation.
During past periods of rising inflation, private real estate strategies have outperformed traditional fixed income by approximately 2%,3 as rental income and property values have tended to rise at least in line with inflation measures.
Exhibit 6: Net Operating Income (NOI) vs. Inflation: Private Real Estate's Built-In Hedge
4. Potential for Attractive Risk-Adjusted Returns
Private real estate historically has delivered competitive returns, consisting of both income from rents as well as property appreciation, while potentially enhancing portfolio diversification. Research suggests that adding a modest allocation to private real estate (e.g., 10% for individual investors) can improve risk-adjusted returns by increasing returns for the amount of risk being taken4. By including both private real estate equity and real estate credit, this improves even more.
In addition, real estate can offer investors a way to access tax-efficient sources of returns. As a hard asset, real estate properties generate depreciation. This can result in a portion, or in some cases, all the income generated by a private real estate investment to be treated as Return of Capital (ROC), which limits the amount of income that is taxable each year and reduces an investor’s cost basis. This means less income is taxed at ordinary dividend rates today. Instead, an investor will pay applicable capital gains tax rates, which are generally lower, if and when they elect to exit their private real estate investment.
Exhibit 7: Adding Private Real Estate May Improve Risk-Adjusted Portfolio Returns
Accessing Private Real Estate
Private real estate can be accessed through several structures, each with different tradeoffs around control, diversification, liquidity, and complexity.
Direct Investment by Individual Managers
Direct investments (single properties or deals) offer full transparency and control—you know exactly what you own and can underwrite every detail. The downside is higher capital requirements, significant expertise needed, and concentrated risk tied to one asset.
Institutional Managers Provide Professional Sourcing, Underwriting, and Ongoing Management, Along with Diversification Across Multiple Properties
This makes portfolio construction and oversight easier, but investors give up control, accept less visibility into individual decisions, and pay additional fees.
Individual Assets vs. Diversified Portfolios
Single-asset investments allow for deep underwriting and the potential for outsized returns, but risk is concentrated—one issue can materially impact outcomes, and liquidity is limited.
Diversified fund spread exposure across many properties and markets, reducing volatility and single-asset risk. They also benefit from active portfolio management, though at the cost of less transparency and direct control.
Sector-Focused vs. Diversified Strategies
Sector-specific funds (e.g., only industrial, residential) offer targeted exposure and the potential to outperform if the specific sector benefits from strong tailwinds. However, the downside concentration risk and require conviction, particularly for more cyclical sectors like retail and hospitality.
Diversified strategies invest across property types and geographic markets, reducing reliance on any single sector and allowing managers to shift capital as opportunities evolve. For most investors, this provides a more balanced risk-return profile, while sector funds are better used as a complement.
Evergreen Funds vs. Drawdown Funds
Evergreen funds (including private REITs and interval funds) offer continuous exposure, periodic liquidity (often quarterly), and immediate capital deployment. They typically focus on income-generating, stabilized assets and are more accessible for a broader range of investors.
Drawdown funds (limited partnerships) require long-term commitments with no periodic liquidity and “blind pool” risk, but provide access to a wider opportunity set, including higher-returning strategies like value-add and development. Returns often follow a J-curve, with gains realized over time as assets are sold.
In practice, many portfolios combine both—using evergreen funds for income and liquidity, and drawdown funds for higher-return potential.
Bottom Line
Private real estate has evolved from a predominantly institutional allocation into a more accessible, flexible tool for building diversified portfolios. For advisors, the opportunity is no longer just understanding the asset class, but knowing how to implement it thoughtfully—balancing income, growth potential, liquidity, and risk across client objectives. By combining equity and credit, leveraging diversified vehicles, and aligning structures with client needs, private real estate can serve as a durable complement to traditional assets.
Frequently Asked Questions
What is a Real Estate Investment Trust (REIT)?
A REIT is a company that owns, operates or finances income-producing real estate. REITs can pool capital from numerous investors similar to Mutual Funds or private placements/limited partnerships but have a distinct focus on real estate. A company that qualifies as a REIT is taxed differently than other corporate entities, which makes them a tax-efficient way of getting exposure to real estate. To qualify as a REIT, the company must invest 75% of its total assets in real estate with 75% of its gross income generated from rents or interest on mortgages.
How Liquid Are Private Real Estate Investments?
Liquidity varies by structure. Evergreen funds, including private REITs, typically offer quarterly or monthly redemptions at net asset value, subject to volume limits. While liquidity is often a feature of evergreen private real estate funds, it’s not guaranteed that investors will be able to fully redeem their requested amount in a given redemption window.
Traditional drawdown funds lock up capital for 7–10+ years with no interim liquidity. Investors should view private real estate as a long-term, illiquid allocation regardless of structure.
What Are the Typical Fees?
Fee structures vary but commonly include annual management fees often based on a percentage of assets, plus potential performance-based fees. Both drawdown and evergreen funds may charge carried interest, typically a percentage of profits above a preferred return. Investors should evaluate all-in costs, including both fund-level and potential property-level expenses that are reflected in returns.
How Are Properties Valued?
Properties are typically valued monthly or quarterly based on actual and expected income, comparable sales, replacement cost, and market conditions, including the interest rate and growth environment. Valuations may be conducted by a manager or a third-party, though it’s generally considered best practice to utilize third-party valuations. This appraisal-based approach combined with transacting at NAV creates a more stable investor experience in private real estate than public REITs that transact at a share price, though both still reflect underlying economic conditions over time.
What Is the Typical Minimum Investment?
Average minimums across the private real estate industry range from $2,500 for interval funds to $10,000 for non-traded and ’40-Act REITs to $5M+ for traditional private funds, but vary by fund and manager. Direct investments investor qualification requirements also vary — some vehicles are available to non-accredited investors, while others are only available to accredited investors or qualified purchasers.
Can I Use Private Real Estate for Tax-Deferred Accounts?
Yes, many private real estate funds are suitable for IRAs and other tax-advantaged accounts. However, non-REIT funds may generate unrelated business taxable income (UBTI), which could create tax consequences even in qualified accounts. Consult a tax advisor before investing retirement assets in leveraged real estate funds.
Explore Other Private Market Asset Classes
Dig deeper into the three other private market asset classes to learn what they are, why they matter, and how they may fit within existing portfolios.
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