Before the 1980’s, institutional investment portfolios allocated investments between three dominating assets: stocks, bonds, and cash— also known as the “Big Three.” Commercial real estate was just one of the alternative asset classes (including hedge funds, private equity, and actual assets such as infrastructure and agriculture) that remained an ulterior investment. Up until the liquidation of real estate in the late 80’s, CRE was largely inaccessible.
As investors sought ways to diversify their investment portfolios, CRE crawled up out of the woodwork of alternative asset classes. In addition, proliferation of its funds allowed the institution’s access to investment opportunities.
Where before CRE had been inaccessible to investors, by the early 90’s rapid advancements in the equity REIT (Real Estate Investment Trusts) market made CRE an alternative course for investors to consider. In 2001, third-party information providers had begun researching and providing the transparency requests necessitated by an asset class. By 2015 target allocation in CRE had risen to 9.62%. Although proprietorship of CRE still maintains its hindrances (lack of transparency, operational requirements, specificity of geography, illiquidity), it has rapidly risen above its fellow alternative asset classes to become the 4th asset class— now the “Big four.”
However, it’s not enough to simply understand the events that catalyzed commercial real estates evolution. Any institutional investment portfolio would do well to consider the pace of CRE’s continuous growth as a permanent allocation. Doing so will help assist in the unearthing of this market’s seemingly limitless potential in today’s 21st century.
Since 2012, capitalization in that commercial real estate sector has climbed to over $400 billion. Another way of gauging CRE’s influx of assets is by examining where institutional investment portfolios typically allocate their funds.
According to The Conference Board, a typical institution investment portfolio from 20 years ago would have allocated 50% to equities, 40% to bonds, and the remaining 10% would be split between cash and alternatives. A stark contrast resides between this and today’s projected distribution, which entails 55% allocated into equities, 20% bonds, 10% into CRE and alternative asset classes, leaving 5% allotted in cash assets. So, as we witness real estate bolstering its equity markets and acquiring developing market institutions’ and independent wealth funds’ portfolios, what is projected in its immediate future?
Based on 2015’s targeted allocation of 9.62%, the international flow of institutional capital would be estimated at $6.7 trillion dollars. This steady increase in CRE allocations only point towards a prosperous future where ownership in the markets will continue to span globally and the gap between debt and equity will continue to shrink. In addition, CRE cycles will become more frequent, facilitating the demand for qualified CRE managers who can thrive in this institutionally revamped industry.
As of now the GICS (Global Industry Classification System), which serves as the foundation for industry analysis, consists of 10 sectors. CRE is arranged to become the 11th sector. And so, as commercial real estate finds itself in the throes of asset class competition, it continues to show promise for growth while it stakes its claim as the fourth asset class in today’s “big four.”