American Realty Advisors


Research Insights, June 05, 2023

The Case for Core Real Estate in the Post-Pandemic Cycle

Cargo doors at big industrial warehouse building

Private core real estate remains a key building block of investors' real estate exposure, which can offer stable income and lower volatility of total returns.


Graphic showing main points covered in the articleWhat is Core Real Estate?  

Core real estate funds invest primarily in assets in major markets that have stabilized occupancy and minimal capital expenditures, and that seek to achieve strong and stable returns with the majority derived over the long term from income. 

These portfolios form the foundation of an investor’s exposure to the institutional real estate asset class. Investors utilize core as the basis upon which more tactical enhanced return strategies can then be layered to achieve return targets. 

Table outlining the characteristics of different real estate strategies, such as return ranges, leverage, market, asset, and risk profiles.

IT Engineer Working with Server Racks

How Are Today’s Core Portfolios Evolving? 

Although the goals that investors seek from core real estate portfolios have remained largely constant throughout market cycles, what constitutes core in terms of property types has not. Not only have allocation preferences shifted but more recently, the opportunities to delve deeper into variations on the basic "four food groups” -- industrial, multi-family, office, and retail -- have given investors a wider opportunity set from which to build their allocations. 

Traditionally, office had long represented the largest holding of ODCE core funds, accounting for more than a third of overall portfolios, with changes in utilization driven by work-from-home coming out of the pandemic, occupancy and values have been challenged and exposures are now below 22%. A similar dramatic shift in investments can be seen in industrial, whose share increased from 13.5% in 2013 to 31% by year-end 2022 (Figure 2). 

Line and sand chart showing the change in allocations to different real estate sectors by core funds from 2013 through 2022.

Further, today’s core portfolios are replete with creative ideas that dive deeper into each sector and provide “variations on the themes” of the four broad categories. Industrial now includes not only traditional inventory storage but also logistics centers, cold storage, and vertical models. What was previously just apartments has morphed into residential encompassing both multi-family and purpose-built single-family rentals communities. Other specialty themes including life science facilities, self-storage, and data center power shells are increasingly included in mainstream core portfolio strategies. 

Shot of Sterile Pharmaceutical Manufacturing Laboratory where Scientists in Protective Coverall's Do ResearchWhat Makes Core Real Estate a Long-term Portfolio Necessity?  

Reliable Income Streams 
In the last decade of historically low rates, real estate picked up the income role in most portfolios traditionally held by fixed income. Rental income provided a steady stream of cash flow for property operations and distribution to investors in need of cash flow. Even as rates have increased, the ability of real estate assets to increase rents in an inflation environment (as well as the benefit of appreciation) give real estate a continuing advantage over other fixed income sources such as bond and provides additional diversification to lower overall portfolio volatility. Roughly 80% of core real estate’s total returns come from this steady income, more than public real estate or equities, with the remainder coming from appreciation (or the increase in the value of a property over time). Though accounting for less than a quarter of core real estate total returns, appreciation is responsible for 83% of annual volatility (as external factors beyond manager control, such as inflation, tenant demand or capital availability) (Figure 3). An asset class that derives more returns from income rather than appreciation tends to have a stabilizing effect in mixed-asset portfolios.

Stacked bar chart showing the share of total returns and share of volatility from income and appreciation for public and private real estate as well as equities.  

Hedge Against Inflation 
Inflation has recently re-emerged as a concern for investors and its corrosive effect on real returns means investors pose a challenge for nominally priced assets. Real estate on the other hand can benefit from inflation that can increase the cost of building materials, labor, and other inputs to constructing or maintaining real estate. This can lead to an increase in the value of existing assets, as it becomes more costly to build new ones. Less supply and rising costs then may allow owners to increase rents and in turn, income returns. While there may be other factors at play, during certain periods where inflation was higher, both income and total returns have increased (Figure 4). 

Bar chart showing the correlation between inflation and private real estate income and total returns both over the long term and in periods where inflation exceeds the 3.5% long-term average for four property types.

Enhanced Portfolio Diversification  
Diversification allows plans to spread their investments across a range of asset classes to minimize overall portfolio risk by reducing the impact of any singular investment class. Real estate has historically demonstrated a low correlation to both stocks and bonds, providing a counterbalance in times when one or more may be underperforming (Figure 5). Core funds also have the added benefit of offering further diversification through holdings in different sectors and markets; if local conditions change in one area, another market may be entirely unaffected.

Table showing correlation coefficient of total returns between public and private real estate, equities and bonds.

Couple Moving Boxes in Storage UnitConclusion 

Real estate has long left behind its old identity as an “alternative” asset class and in most portfolios stands shoulder to shoulder with equities and fixed income. While in a rapidly changing market environment, a more illiquid asset class such as real estate may pose challenges to maintaining strict portfolio allocations, it also reinforces the importance of having a long-term investment perspective and the folly of trying to market time intermediate term market fluctuations.

Core real estate continues to evolve — investors now have more choices to build successful portfolio strategies while still enjoying relative stability and predictable income streams, inflation-hedging properties, and portfolio diversification enhancement.
The fundamental benefits of core real estate have remained consistent over time and looking ahead, opportunities for investors will continue to evolve, shaped by technological advancements, changing work and living patterns, and broader economic trends. Although no one has a crystal ball or clear vision into the future, experienced managers with creative strategies that embrace the changing landscape will be best positioned to navigate this evolving market. Successful investing is not necessarily about predicting the future; it is about preparing for it and having the insight to capitalize on market changes to achieve long-term investment goals. 



The information in this newsletter is as of May 25, 2023, is for informational and educational purposes only, is not intended to be relied on to make any investment decisions, and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments in any jurisdiction. This newsletter expresses the views of the author as of the date indicated and such views are subject to change without notice. The information in this newsletter has been obtained or derived from sources believed by ARA to be reliable but ARA does not represent that this information is accurate or complete and has not independently verified the accuracy or completeness of such information or assumptions on which such information is based. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce. Past performance of any kind referenced in the information above in connection with any particular strategy should not be taken as an indicator of future results of such strategies. It is important to understand that investments of the type referenced in the information above pose the potential for loss of capital over any time period. This newsletter is proprietary to ARA and may not be copied, reproduced, republished, or posted in whole or in part, in any form and may not be circulated or redelivered to any person without the prior written consent of ARA.

Forward-Looking Statements

This newsletter contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements are statements that do not represent historical facts and are based on our beliefs, assumptions made by us, and information currently available to us. Forward-looking statements in this newsletter are based on our current expectations as of the date of this newsletter, which could change or not materialize as expected. Actual results may differ materially due to a variety of uncertainties and risk factors. Except as required by law, ARA assumes no obligation to update any such forward-looking statements.

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