Diversification as One of Real Estate’s Enduring Qualities

October 11, 2018 | Beth Glavosek | Blue Vault

From time to time, it’s good to revisit the basics of why commercial real estate (CRE) makes sense for many investors.
 
The opportunity for diversification is one of the main characteristics that has attracted investors to this type of investment through the years.
 
Diversification from the Stock Market
Most investors are familiar with the ups and downs of stocks, bonds, and mutual funds. The stock market is subject to the day-to-day “emotions” of the market based on investor sentiment, events of a political, economic or social nature, and any number of other factors. Real estate has its ups and downs too, but it’s generally considered to operate independently of the stock market. Therefore, investors can expect allocations to real estate to perform differently than other investments within their portfolios, thereby providing diversification.
 
Diversification by Sector
CRE also provides opportunities for diversification within the real estate sector itself. CRE is broadly defined as any property that can produce income. The most common categories of CRE include office, retail, industrial, medical, hospitality, multi-family, land, and other leasable commercial space. Investors can allocate to these sectors according to their investment objectives.
 
Further, investors can take advantage of growth opportunities created by societal or demographic trends. For example, industrial real estate is attractive at the moment because of the growth in e-commerce and the need for distribution facilities. As another example, investments in student and senior housing facilities have taken off because of population shifts that are fueling demand. In other words, there are many opportunities for even further diversification within real estate’s overall diversification benefits.
 
Diversification by Property Characteristics
Investors can also look at characteristics such as geographic location, quality of property, and tenant attributes when making allocations to real estate. Such considerations might include:

• Are the properties located in established major metropolitan markets or urban centers (New York, Los Angeles), or are they in up and coming markets spurred by population shifts (Orlando, Austin)?
• Where do the properties fall on a quality spectrum, from core (most conservative) to opportunistic (most risky, but perhaps with greater appreciation potential)?
• Who are the tenants? In addition to tenant quality and creditworthiness, what industries do they represent?

In future blog posts, we’ll look at real estate’s other characteristics that appeal to investors, such as the opportunity for capital appreciation, current yield, inflation hedging, and more.