Commercial Real Estate Investing:
Understanding the Opportunity

This large asset class is dominated by private real estate – which offers investors the potential for attractive long-term returns, a robust income component, lower volatility than stocks, and enhanced portfolio diversification.

Explore the benefits of investing in private real estate.

At the heart of the market: Private real estate

Commercial real estate investing is often associated with publicly traded REITs, yet REITs are just the tip of the iceberg. Indeed, private real estate represents 90% of this $10.7 trillion market.

For many years, high investment minimums limited direct investment in U.S. private real estate to institutions and ultra-wealthy individuals. However, new types of investment solutions are opening the sector to a wider spectrum of investors.

Private real estate dominates the U.S. commercial real estate market

Total capitalization

Private real estate dominates the U.S. commercial real estate market

Source: Securities Industry and Financial Markets Association, Urban Land Institute, NAREIT, NCREIF and Clarion Partners Investment Research. Annual data and estimates as of December 31, 2018. U.S. commercial real estate includes private and public equity investments. Numbers may not sum due to rounding.

Diversification does not assure a profit or protect against market loss. All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

A useful complement to equities

Private real estate and publicly traded REITs are quite different from an investment standpoint, exhibiting varying levels of volatility and patterns of return. However, private real estate has a much lower correlation to U.S. stocks, making it a more effective portfolio diversifier.

Distinct features of private real estate

Private real estate

Investors make a direct investment in property

Property is managed directly or through a third-party property manager

Historically lower volatility than publicly traded REITs

Publicly traded REITs

Investor makes indirect investment via shares of a publicly listed real estate company

Property is operated/managed via that public company

Historically higher volatility than private real estate

Private real estate — a better source of diversification

Real estate correlations vs. S&P 500

Real estate correlations vs. S&P 500

Source: Bloomberg. Stocks, publicly traded REITs, and private real estate are respectively represented by the S&P 500 Index, FTSE NAREIT All Equity REITs Index and NFI-ODCE Index. Correlations are based on quarterly observations from 3Q1999 to 2Q2019. Volatility, or risk, is represented by standard deviation. For more information on long-term data for volatility and return, refer to Attractive Returns section on this page. Please refer to Definitions and Risks at the bottom of the page for definitions on standard deviation and correlations.

Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Diversification does not assure a profit or protect against market loss. All investments involve risk, including loss of principal.

Specialization is essential to navigating this unique market

Real estate market dynamics are influenced by many factors – demographics, location, property type, economic conditions and more – presenting opportunities for specialized managers with expertise and resources to capture value.

Warehouse

Warehouse

Distribution centers,
manufacturing,
showrooms

Apartment

Apartment

Multifamily
residential
complexes

Office

Office

Traditional
workspace,
medical labs

Retail

Retail

Stores,
malls

Hotel

Hotel

Resorts and
other lodging

For illustrative purposes. Does not represent all types of properties, which may include (but are not limited to) warehouse, apartment, office, retail, hospitality, student housing, medical and health care facilities, and self-storage.

Trends influencing private real estate investing

Demographics, technology and lifestyle trends are changing how we live, work and shop, and these trends are creating new opportunities in different areas of real estate.

Select any topic to learn more.

Live

live

Young adults who postponed having families are now seeking housing of their own.

Down Arrow
Work

work

Technology and mobility enable more flexibility in the workspace.

Down Arrow
Play

shop

Online shopping has pushed up demand for warehouses and fulfillment centers.

Down Arrow

*Source: Clarion Partners

Private real estate investing: potential benefits

Select any topic to learn more.

Stable income

Stable income

Diversification

Diversification

Attractive returns

Attractive returns

Wealth preservation

Wealth preservation

Supported by contractual payments from rents and leases

20-year yield average (%)

Supported by contractual payments from rents and leases
Real estate performs differently than stocks and bonds over time

Low correlations: Private real estate vs. stocks, bonds and publicly traded REITs

Real estate performs differently than stocks and bonds over time
Offers attractive risk-adjusted return potential over market cycles

20-year risk and return (%)

Offers attractive return potential over market cycles
Serves as a hedge against inflation and volatile public markets

% of quarters with positive returns

Serves as a hedge against inflation and volatile public markets

Source: Bloomberg and NFI-ODCE Index. 20-year historical observations are as of 20192Q. Stocks, bonds, publicly traded REITs and private real estate are respectively represented by the S&P 500 Index, Bloomberg Barclays U.S. Aggregate Bond Index, FTSE NAREIT All Equity REITs Index and NFI-ODCE. Annualized return, risk (based on standard deviation), correlations and quarters with positive returns are based on quarterly observations. 20-year yield averages are based on trailing 12-month observations for dividend yield for stocks and publicly traded REITs, yield-to-worst for bonds and 12-month income for private real estate.

Please refer to Definitions and Risks at the bottom of the page for definitions. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Diversification does not assure a profit or protect against market loss. All investments involve risk, including loss of principal.

Explore how private real estate can impact a portfolio

Analyze the effect of adding private real estate to a portfolio of U.S. stocks and bonds.

Step 1: Select an initial portfolio mix of stocks and bonds

20% Stocks
80% Bonds
40% Stocks
60% Bonds
60% Stocks
40% Bonds
80% Stocks
20% Bonds

Step 2: Select an allocation to private real estate

0%
5%
10%
15%
20%

Portfolio Allocations

  • Stocks
  • Bonds
  • Private Real Estate

Risk and Return Impact

  • Portfolio with a dedicated real estate exposure
  • Portfolio without a dedicated real estate exposure

Source: Clarion Partners Investment Research, NCREIF, S&P, Bloomberg. Data as of June 30, 2019. 20-year analysis for annualized total return and annualized risk is based on quarterly observations. Stock, bonds and private real estate are respectively represented by the S&P 500 Index, Bloomberg Barclays U.S. Aggregate Bond Index and NFI-ODCE Index. Annualized risk is represented by standard deviation. Standard deviation measures the risk or volatility of an investment’s return over a particular time period; the greater the number, the greater the risk. Please refer to Definitions and Risks at the bottom of the page for definitions.

For illustrative purposes only. Hypothetical portfolio results shown do not represent the performance of an actual investment. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Diversification does not assure a profit or protect against market loss. All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

Access the benefits of private real estate investing now

Until recently, access to commercial real estate was limited by the need for large capital commitments and difficulty in securing the specialized expertise needed to assess properties in multiple markets.

Clarion Partners, one of the largest pure-play real estate managers, has designed an innovative solution for investors that provides access to income-producing commercial real estate.

Definitions and Risks

NFI-ODCE Index: NCREIF Fund Index – Open End Diversified Core Equity includes open-end commingled funds pursuing a core investment strategy, primarily investing in private equity real estate. This is a quarterly, capitalization-weighted, gross of-fee, time-weighted return index with an inception date of December 31, 1977.

FTSE NAREIT All Equity REITs Index: The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property.

S&P 500 Index: The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

Bloomberg Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues rated investment grade or higher and having at least one year to maturity. Please note that an investor cannot invest directly in an index.

Correlations: Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated. Correlation refers to a relationship existing between mathematical or statistical variables which tend to vary, be associated, or occur together in a way not expected based on chance alone.

Standard deviation: Standard deviation is a statistic used as a measure of the dispersion or variation in a distribution, or data set, from its mean, or average; it measures the volatility of an investment’s return over a particular time period; the greater the number, the greater the volatility.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, a forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account.

Investments in real estate are subject to risks including but not limited to local, state, national or international economic conditions, including market disruptions caused by regional concerns, political upheaval, sovereign debt crises and other factors.

©2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Clarion Partners, LLC and Legg Mason Investor Services are subsidiaries of Legg Mason, Inc.