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Sponsored: Leveraging Commercial Real Estate as a Diversification Tool for Client Portfolios

By Keith Lampi, president and chief executive officer, Inland Real Estate Investment Corporation

In recent years, financial professionals have increasingly turned to commercial real estate as a valuable investment to diversify and strengthen client portfolios. This shift has been driven by the desire to enhance the traditional 60/40 portfolio mix, especially after the market volatility experienced in 2022.

Advisers are recognizing the benefits of commercial real estate – particularly in alternative real estate sectors such as self-storage, medical outpatient buildings, and student housing – as highlighted in an Urban Land Institute article earlier this year: Investors Fueling Growth in Alternative Property Sectors.

Yet despite the increasing use of alternative property sectors, many advisers remain unfamiliar with these investment strategies, which may limit portfolio exposure to these viable real estate investment strategies and impede broader adoption.

A Migration to Alternatives
The movement toward alternative investments, including real estate, is part of a broader trend that has been referred to as the Great Reallocation. This trend reflects the need to improve portfolio performance and minimize portfolio volatility by incorporating asset classes other than stocks and bonds that are not influenced by the movements of the public markets.

According to a survey by iCapital, 80 percent of financial advisers currently use alternative investments, with a growing number seeking to include these assets in client portfolios over the next 12 months.​ The potential for commercial real estate to offer stable returns and act as a hedge against market volatility makes it an attractive option for diversification.

A Host of Investor Benefits
Commercial real estate offers several benefits that address various needs:

  1. Reducing volatility: Commercial real estate may provide a stable income stream, which can help mitigate portfolio volatility. Unlike stocks, commercial real estate investments are less susceptible to market fluctuations, offering more predictable returns.
  2. Recession-resilient strategies: Many alternative commercial real estate sectors, such as medical outpatient buildings, senior housing, student housing, and manufactured housing communities have proven resilient during economic downturns due to consistent demand drivers.
  3. Inflation hedging: Real estate typically appreciates with inflation, and rental income can adjust to rising costs, providing a natural hedge against inflation.
  4. Non-correlation: Commercial real estate’s performance often does not correlate with traditional equity and bond markets, making it a useful tool for achieving diversified growth.
  5. Tax deferral and elimination: Investments in Delaware statutory trusts and other tax-advantaged real estate investment strategies offer significant tax benefits, including deferral of capital gains and potential tax elimination under certain conditions.

Primary Real Estate Investment Solutions
There are two primary real estate investment solutions to consider to effectively integrate commercial real estate into a portfolio:

Tax-Advantaged Real Estate Strategies

  1. Tax-efficient investment vehicles like DSTs and qualified opportunity zone funds are designed to minimize tax liabilities and can play a crucial role in wealth preservation and growth. These investment vehicles may optimize returns and defer or eliminate capital gains taxes.

Income and Growth Real Estate Strategies

  1. These strategies focus on properties with the potential for capital appreciation and durable cash flow. Opportunistic, value-add, and development projects fall into this category, offering higher returns but with increased risk. Both traditional and alternative real estate sectors can be utilized, providing a balanced approach to income generation and growth within a client’s portfolio.

Commercial real estate offers a broad range of strategies that can help meet investors’ diverse needs. By integrating tax-advantaged and/or income and growth strategies, portfolios may experience enhanced returns, diversification, and resilience during times of economic volatility.

To learn more about how Inland can support your investment strategies, contact your Inland wholesaler or call 866-My-Inland.

This is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by an offering memorandum or prospectus that has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers and registered investment advisers authorized to do so. An offering is made only by means of the offering memorandum or prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the applicable offering memorandum or prospectus must be made available to you in connection with any offering. This communication is not intended as tax advice.

Some of the risks related to investing in commercial real estate include, but are not limited to: market risks such as local property supply and demand conditions; tenants’ inability to pay rent; tenant turnover; inflation and other increases in operating costs; adverse changes in laws and regulations; relative illiquidity of real estate investments; changing market demographics; acts of God such as earthquakes, floods or other uninsured losses; interest rate fluctuations; and availability of financing.

The views expressed herein are subject to change based upon economic, real estate and other market conditions. These views should not be relied upon for investment advice. Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

The Inland name and logo are registered trademarks being used under license. “Inland” refers to some or all of the entities that are part of The Inland Real Estate Group of Companies, Inc. which is comprised of a group of independent legal entities some of which may be affiliates, share some common ownership or have been sponsored and managed by such entities or subsidiaries thereof including the Inland Real Estate Investment Corporation (Investments) and Inland Securities Corporation. Inland Securities Corporation, member FINRA/SIPC, is dealer manager and placement agent for programs sponsored by Inland Investments and Inland Private Capital, respectively. For more information on Inland Securities Corporation, visit FINRA BrokerCheck.

Inland Private Capital Corporation is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.

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