Nonetheless, the Covid pandemic has impacted the commercial real estate sector. Distribution warehouses tied to e-commerce are booming, but office real estate remains in flux.
“Covid is a narrative still playing out,” Strauser said. “With vaccine deployment, we’ve seen more companies with return-to-work policies. We think after Labor Day we’ll see more companies attempting to get their employees back into the office. Tech companies are still taking real estate and signing new leases.
“With multifamily, we’ve seen an influx of people leaving big, high-tax, high-cost-of-living cities and moving to the Sunbelt,” he added. “That was accelerated during Covid. I think malls will have a tough time. They were probably the most impacted from a shutdown perspective and probably from a valuation perspective. They were struggling before Covid, and I think we’ll see [malls] replaced by grocery-centered retail and e-commerce as the main ways that people buy their goods.”
He noted that grocery-centered retail is anchored by a large grocery center, with service-oriented businesses such as hair salons and restaurants filling out the storefronts.
Regarding correlations, Strauser pointed out that over the 20-year period through 2020, private real estate had a correlation to the S&P 500 of 11 basis points, or 11%. That compares to public real estate’s higher correlation of 70 basis points, or 70%. And during the most recent 10-year period that excludes the great financial crisis, private real estate’s correlation to the S&P 500 was 22% versus the 75% correlation with public real estate.
How It’s Structured
Some investors eschew private real estate because it’s less transparent (monthly valuations versus daily valuations), is less liquid and traditionally has higher fees vis-à-vis public real estate.
“The industry changed in 2012, and the structure became much more investor friendly,” said Steve Stroker, CEO of Black Creek Capital Markets. “Many have performance-driven fee structures. The sponsor has an asset management fee, but doesn’t participate until investors earn a 5% to 6% return.”
He added that there are new fee-based classes. “I know many of the people [i.e., financial advisors] on this call would probably look at an advisory share class, taking out any of the embedded fees there and then charging their advice fee on top of that.”
In addition, Stroker said, private real estate investment minimums can be as low as $10,000 or less. Regarding liquidity, he said the standard for a lot of private real estate funds it to meet 2% of redemption requests per month, 5% per quarter and 20% per year.
Stroker added that investor redemptions—as well as purchases—of private real estate typically are at net asset value.
Furthermore, he noted that private REITs can be held at all of the big custodians, and he believes these products can help advisors differentiate their practices.
In his parting shot, Stroker offered that the less-liquid nature of private real estate is one of its virtues.
“The saying goes that it’s not market timing, but time in the market,” he said. “I think private real estate helps the time in the market because it typically trades at net asset value and never trades at a premium or discount. The whole industry proved its mettle in 2020, as private real estate had muted returns and our funds had positive results every month last year. It’s a good stabilizing force in portfolios.”