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Alternatives Unlocked: Private Real Estate
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Unlocking Private Real Estate

WHAT IS PRIVATE REAL ESTATE?

Commercial Real Estate

Commercial real estate refers to the many different kinds of properties that are used for business or investment purposes with the goal of generating capital appreciation, income, or both. Private commercial real estate investments are typically negotiated directly and do not trade in public markets.

Video: Introduction to Private Real Estate

Commercial Real Estate Sectors

Different types of commerical real estate include:

 

Commercial Real Estate Classifications

Class A

Highest quality real estate properties in prime locations; often new construction or recently renovated
Class B

Middle-quality, generally older, functional and usable space that may require some upgrades or renovations
Class C

Lowest quality, old or outdated property that may not be operated or maintained well

Private Real Estate Equity and Credit

There are two main categories of real estate investments 
Equity represents ownership interest in a property
 
  • The value of an equity interest represents the value of the property minus outstanding debt, such as a mortgage. 
  • Return on an equity investment is derived through rental income, property value appreciation, or the sale of the property. 
A loan, often a mortgage loan, where an institution lends money to the owner of a real estate property and earns interest on the loan
 
  • Helps to fund commercial property purchases, finance new development, and allow existing property owners to refinance assets
  • Lenders may include banks, insurance companies, government-sponsored enterprises, asset management firms, or specialty real estate lenders. 

Commercial Real Estate Capital Stack

The real estate capital stack helps illustrate how both real estate equity and credit factor into the total value of a property.

Real Estate Equity and Credit in Different Market Environments



Fluctuating property values affect equity and debtholders differently. Debtholders typically have more certainty and downside protection than equity owners.  

In the example on the right, we show that the initial equity is $40, the debt is $60 and the gross property value is $100. In the middle bar example, we see the gross property value increase by 20%, causing the equity value to go from $40 to $60, but the debt principal is unchanged at $60. On the right bar example, we see the gross property value decrease in value by 20%, causing the equity value to go from the initial $40 to $20, but once again the debt principal is unchanged at $60. 

Fluctuating property values affect equity and debtholders differently
For illustrative purposes only. Structural seniority is no guarantee against future losses or the receipt of interest and/or principal payments.
Fluctuating property values affect equity and debtholders differently
For illustrative purposes only. Structural seniority is no guarantee against future losses or the receipt of interest and/or principal payments.

ATTRIBUTES OF REAL ESTATE INVESTMENTS

Private Real Estate Investments Typically Seek to Deliver... 

Commercial real estate is the 3rd largest asset class in the U.S.
Commercial real estate is the 3rd largest asset class in the U.S.
Source: Bloomberg. Equities data as of March 12, 2025. Source: SIFMA, Bloomberg, The Federal Reserve, US Agencies, US Treasury. Fixed Income data as of Q4-2024 except for MBS (Q4-2021). Source: Nareit, CoStar, Green Street. CRE data as of Q2-2021. Source: McKinsey & Company, Preqin. Estimates of private markets assets are as of H1 2021.
Commercial real estate is the 3rd largest asset class in the U.S.
Source: Bloomberg. Equities data as of March 12, 2025. Source: SIFMA, Bloomberg, The Federal Reserve, US Agencies, US Treasury. Fixed Income data as of Q4-2024 except for MBS (Q4-2021). Source: Nareit, CoStar, Green Street. CRE data as of Q2-2021. Source: McKinsey & Company, Preqin. Estimates of private markets assets are as of H1 2021.
Private real estate income has generally outpaced inflation since the mid-1990s.
 
 

U.S. Real Estate Net Operating Income (NOI) vs. CPI Inflation

U.S. Real Estate Net Operating Income (NOI) vs. CPI Inflation
There can be no assurance that the trends described herein will continue. Source: NCREIF, Bloomberg, KKR Global Macro, Balance Sheet & Risk analysis. Data as of June 30, 2023. Note: Cumulative “same-store” net operating income (NOI) growth of properties in the NCREIF Index versus cumulative U.S. CPI growth, indexed to 100.
U.S. Real Estate Net Operating Income (NOI) vs. CPI Inflation
There can be no assurance that the trends described herein will continue. Source: NCREIF, Bloomberg, KKR Global Macro, Balance Sheet & Risk analysis. Data as of June 30, 2023. Note: Cumulative “same-store” net operating income (NOI) growth of properties in the NCREIF Index versus cumulative U.S. CPI growth, indexed to 100.
Private real estate may provide the potential for meaningful portfolio diversification.
 

A thematic private real estate strategy that includes real estate credit and equity has shown low correlation to stocks and bonds 

Private real estate may provide the potential for meaningful portfolio diversification.
There can be no assurance that the trends described herein will continue or benefit the Fund. Please see the Prospectus for further information on the Fund’s terms, provisions and risk factors. Please refer to definitions and important disclosures in the Glossary of Terms starting on page 40. Please refer page 4 for index definitions and other important disclosures pertaining to the comparison of different asset categories. Returns for the Custom Thematic Real Estate Index are approximated using 3 baskets of securities each sized to 1/3 of the portfolio: 1) Stabilized Real Estate (proxied using 50% NCREIF NPI Residential Index and 50% NCREIF NPI Industrial Index), 2) Prime Single-Tenant (proxied using 50% NCREIF NPI Stabilized Office Index and 50% NCREIF NPI 90%+ Leased, Stabilized Industrial Index, each index using properties that are 90% leased or greater and were built or renovated post 2000), and 3) real estate mezzanine debt / preferred equity and CMBS securities (proxied using 70% allocated to the Giliberto Levy Commercial Mortgage Index, and 30% Bloomberg US MBS/ABS/CMBS Securitized Index). Private Core Real Estate Equity is proxied using the NCREIF Open-Ended Diversified Core Equity (ODCE) property index, Private Real Estate Debt is proxied using the Giliberto Levy Commercial Mortgage Index, Global Equities are proxied by the MSCI AC World Index, Global High Yield and Investment Grade Corporate Bonds by the Bloomberg Global High Yield and Global Aggregate Corporates Indices, Global Government Bonds using the Bloomberg Global Aggregate Treasuries Index, Global REITs using the FTSE NAREIT All Equity REITS Index, and Global Commodities using the S&P GSCI Total Returns Index. Correlations estimated using 20 years of quarterly data ending 12/31/2024. This material is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein. Source: NCREIF, Giliberto Levy, MSCI, Bloomberg, KKR Portfolio Construction
Private real estate may provide the potential for meaningful portfolio diversification.
There can be no assurance that the trends described herein will continue or benefit the Fund. Please see the Prospectus for further information on the Fund’s terms, provisions and risk factors. Please refer to definitions and important disclosures in the Glossary of Terms starting on page 40. Please refer page 4 for index definitions and other important disclosures pertaining to the comparison of different asset categories. Returns for the Custom Thematic Real Estate Index are approximated using 3 baskets of securities each sized to 1/3 of the portfolio: 1) Stabilized Real Estate (proxied using 50% NCREIF NPI Residential Index and 50% NCREIF NPI Industrial Index), 2) Prime Single-Tenant (proxied using 50% NCREIF NPI Stabilized Office Index and 50% NCREIF NPI 90%+ Leased, Stabilized Industrial Index, each index using properties that are 90% leased or greater and were built or renovated post 2000), and 3) real estate mezzanine debt / preferred equity and CMBS securities (proxied using 70% allocated to the Giliberto Levy Commercial Mortgage Index, and 30% Bloomberg US MBS/ABS/CMBS Securitized Index). Private Core Real Estate Equity is proxied using the NCREIF Open-Ended Diversified Core Equity (ODCE) property index, Private Real Estate Debt is proxied using the Giliberto Levy Commercial Mortgage Index, Global Equities are proxied by the MSCI AC World Index, Global High Yield and Investment Grade Corporate Bonds by the Bloomberg Global High Yield and Global Aggregate Corporates Indices, Global Government Bonds using the Bloomberg Global Aggregate Treasuries Index, Global REITs using the FTSE NAREIT All Equity REITS Index, and Global Commodities using the S&P GSCI Total Returns Index. Correlations estimated using 20 years of quarterly data ending 12/31/2024. This material is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein. Source: NCREIF, Giliberto Levy, MSCI, Bloomberg, KKR Portfolio Construction

CONSIDERATIONS FOR REAL ESTATE INVESTING

Evaluating Commercial Real Estate Investments

There are several factors to consider when investing in commercial real estate equity and credit. ​

1
INVESTMENT PURPOSE AND TIME HORIZON
2
EXPECTED CASH FLOWS AND PROFIT OPPORTUNITIES
3
NEW CONSTRUCTION VS. EXISTING PROPERTY 
4
PROPERTY VALUATION
5
LEVERAGE
6
OVERALL REAL ESTATE MARKET
7
PROPERTY LOCATION
8
TENANT QUALITY

Commercial Real Estate Risk Investment Categories​

All of the factors above play a part in determining the risk and return profile of a commercial real estate investment. The common risk classifications below provide a framework for understanding risk and return expectations across different types of real estate investments. ​

Core
 
  • High-quality, fully-leased properties in diversified metropolitan areas​
  • Low risk/return, low leverage
Example

New, full-leased, multifamily luxury apartment building in a great location​

Core-Plus
 
  • Well-occupied properties with potential to increase cash flows through light property improvements​
  • Moderate risk/return, moderate leverage
Example

Well-occupied, multifamily apartment in a good location but in need of light upgrades ​

Value Add
 
  • Properties that could be improved at a modest expense with the intention of improving the asset and increasing cash flows to sell at a higher value
  • Higher risk/return, higher leverage
Example

Renovation and modernization of a multifamily apartment building​

Opportunistic
 
  • New construction, redevelopment or major repositioning
  • Highest risk/return potential, highest amount of leverage​
Example

Construction and lease-up of a brand-new multifamily apartment building​

Credit
 
  • Origination or acquisition of a loan(s), or part of a loan(s) that are secured by real estate (providing capital in the form of debt)

Example
A senior mortgage loan on a multifamily apartment building​

 

Types of Commercial Real Estate Investment Vehicles

There are four primary ways to invest in commercial real estate today

Characteristics of Real Estate Investment Trusts (REITs)

REITs typically offer the following characteristics, although the benefits and risks of each REIT investment are unique and should be evaluated independently.    

Benefits of REITs
Diversification PotentialProfessional ManagementRegular Income PotentialGrowth PotentialPotential Tax Advantages

Diversification across property types, geographic locations, and tenants

Potentially different risk/return characteristics than stocks and bonds

Professional management by experienced, well-resourced experts

 

Legal requirement to distribute 90% of income through dividends can provide investors with a steady income stream

Portfolio appreciation can benefit investment value and drive dividend growth while rent growth may support dividend growth

Favorable tax treatment of REIT dividends

Return of Capital (ROC) may enhance tax-efficiency of REIT dividend income

Publicly Traded REITs vs. Private REITs

 
 Publicly Traded REITs
Private REITs
AccessInvestors buy and sell shares on public exchangesInvestors invest directly with the manager or through an intermediary; not traded on an exchange
InvestmentsPortfolios of real estate properties or loans that may be diversified by property type and/or geographyPortfolios of real estate properties or loans that may be diversified by property type and/or geography
LiquidityExchange-traded: Investors buy and sell shares, enabling them to access their money more quickly if neededIlliquid or semi-liquid: A level of periodic liquidity is typically provided subject to certain thresholds and requirements
Pricing depends on public market sentimentInvestors buy and sell at a share price that may be different than the underlying value of the REIT’s portfolioInvestors subscribe and redeem at net asset value
Explore Continuing Education On-Demand

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Explore Other Private Market Asset Classes
Dig deeper into three other private market asset classes to learn what they are, why they matter, and how they may fit within existing portfolios.
  • Private Equity
    Private equity involves investment in private companies with growth potential or private businesses that need financial restructuring with the intention of enhancing the value of the invested companies over time.
    Explore Private Equity
  • Private Infrastructure
    Private Infrastructure entails the raising of private capital to fund the development of infrastructure, including the physical structures, facilities and systems, required for economies and societies to function.
    Explore Private Infrastructure
  • Private Credit
    Private credit consists of investment in privately negotiated loans issued from non-bank lenders to middle market companies that are typically not publicly traded.
    Explore Private Credit

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