Private Commercial Real Estate Is a Key Component in Alts Conversation

Following a brutal 2022 in which the S&P 500 posted its seventh-worst showing since the 1920s, the Bloomberg US Aggregate Bond Index slumped to its worst performance since inception in 1976, and the 60/40 portfolio suffered its worst annual returns in 100 years. We think it’s safe to say that financial advisors may be reviewing their clients’ portfolios, and are reexamining the role of alternative investments and how they may help improve their risk/return profile when added to a traditional portfolio.

Private commercial real estate is part of the “alts” landscape. It’s also an asset class that’s subject to increasing accessibility thanks to firms such as CrowdStreet Advisors. For financial advisors, the availability of direct private commercial real estate deals offered through funds managed by CrowdStreet Advisors is a value-add proposition not only when it comes to allocating portions of client portfolios to alts, but also when considering the gravity of real estate as an asset class – it’s the third largest in the world, trailing only bonds and cash. It deserves a seat at the table.

Important Potential Benefits of Private Commercial Real Estate

Drilling down on what’s really important to clients, there are myriad potential benefits advisors can highlight regarding private commercial real estate, some of which are relevant in the current macroeconomic environment.

As CrowdStreet Chief Investment Officer Ian Formigle points out, private commercial real estate has an established track record as an asset with the potential to help mitigate the effects of inflation – something to ponder as the Consumer Price Index (CPI) remains around four-decade highs.

“As inflation occurs, rents tend to increase and keep pace with inflation over time, ” said Formigle. “And you can see that indexes such as NAREIT and Nacrief, which track both private and public commercial real estate performance, have tended to beat the S&P 500 during inflationary periods.”

Private commercial real estate’s potential to mitigate inflation effects is a possible selling point for another reason. While the November reading (the month for which data are most readily available) of the CPI showed a decline to 7.1%, it remains to be seen how long and at what cost it takes the Federal Reserve to drive inflation back to its desired range of 2%. Said another way, consumer and producer prices could be higher for longer than anticipated, further accentuating the importance of hard assets such as real estate.

“So to the extent that inflation remains a little bit higher than average, we also know that as a hard asset, commercial real estate has the potential to help mitigate the effects of it. Assets mark to market through rental increases, increases in rental income turn into increases in net operating income, and that, all things being equal, increases asset values,” adds Formigle.

Private Commercial Real Estate Made Easy

Private commercial real estate doesn’t have to be a complex asset class. In fact, CrowdStreet’s CrowdStreet REIT I, Inc. (C-REIT) simplifies the way investors can access it, offering advisors a single access point for investing in real estate across regions, sponsors, and asset types, and geared for extended holding periods.

“I think the key thing for advisors to keep in mind is that as an alternative investment, it is a very large ubiquitous asset class, and when you consider that for many sophisticated institutional investors, an allocation to alts can range from 15% to 30% or more of their portfolio, it makes sense for advisors and their clients to consider allocating to private commercial real estate,” concludes Formigle.

C-REIT enables advisors to present clients with access to private commercial real estate with a lower investment minimum ($25K) than they can find in most other private funds, 20+ investments under one umbrella, and with efficient 1099 tax reporting, instead of K1s.

Related: Rounding Out the Portfolio in Real Estate with Ian Formigle

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