Fund Manager CrowdStreet Advisors Explains Private Commercial Real Estate Investing For Wealth Management Clients
As WSR readers know, alternative investments experienced a banner year in 2022 as technology and trends made them more available to retail investors than ever and advisors featured alts in client portfolios for purposes of diversification and strategy as bear markets dominated for both equities and bonds.
While alts come in many different types, real estate is typically the first alternative asset class that comes to mind for most investors. Under its umbrella falls a wide array of commercial and residential asset types and investment strategies, ranging from exclusive private funds to renting out a vacation home.
One firm bringing real estate alternatives to financial advisors is CrowdStreet Advisors, which manages more than 25 private real estate funds. The firm, a subsidiary of CrowdStreet, specializes in private commercial real estate, and had $431 million in assets under management at the end of the third quarter.
The firm recently announced an initiative to accelerate the development of products and services that bring private commercial real estate and other alts to financial advisors, including its flagship C-REIT, a growth-oriented private fund designed to further the accessibility of private commercial real estate for retail investors through a relatively low investment threshold, 1099 tax reporting and a transparent structure.
CrowdStreet Advisors’ President Sheldon Chang sat down with us to discuss the private commercial real estate market, its pros and cons for advisors’ clients and how it will develop in 2023.
WSR: What are some of the pros and cons for advisors’ clients investing in private commercial real estate?
Chang: Until recently, many advisors and their clients may have had limited investment options in the private commercial real estate market. Their main exposure has been through non-traded REITs, which focus on core and core-plus strategies that invest in stabilized properties and target steady income generation.
Growth-oriented funds – those that invest in opportunistic, development and value-add projects – offer capital appreciation and growth, but are primarily available only to institutional and ultra-high net worth investors, such as endowments, typically through private funds with high minimums.
Consequently, most individual investors can’t build a truly complete and diversified real estate portfolio, given the lack of access to growth-focused strategies. These kinds of properties inherently carry more risk than their stabilized counterparts, including the possibility of a total loss of capital, and require expertise to source and vet, but they also offer the potential to generate outsized returns.
WSR: What different types of commercial real estate investments are available for advisors’ clients? What diversification benefits can these bring, and how do the diversification benefits vary among different types of commercial real estate investments?
Chang: We believe managers should invest in a diverse mix of property typesand strategies, including multifamily, build-to-rent residential, industrial, healthcare/life sciences and Qualified Opportunity Zones, and focus on high-growth secondary metro regions like Austin, Nashville and Raleigh-Durham. We’ve followed this strategy in our funds because it provides asset and geographic diversification to investment portfolios.
Investing in and holding hard assets like commercial real estate during above-average inflationary periods is generally considered a good strategy, especially if the asset class allows for rapid rent adjustments. Some property types typically mitigate inflation effects more than others, such as multifamily, self-storage and hospitality because:
- Short leases can be renewed at higher rents;
- High institutional investor interest creates greater liquidity; and
- Widely available and inexpensive fixed-rate agency debt is available through Fannie Mae and Freddie Mac.
WSR: How do you see the private commercial real estate market developing in 2023?
Chang: We believe that nearly every asset class has the potential for growth. Certain assets are far from “on-sale” and continue to be driven by robust underlying fundamentals, while others show signs of pivoting off their lows and potentially offering acquisition opportunities.
We view the market as more balanced and better positioned for broader, albeit moderated, growth across the board. At the same time, we anticipate attractive opportunities in 2023 as market uncertainty continues to make capital scarce.
Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org