Essentials of Private Real Estate

Private Real Estate: What You Need to Know

Large Market Opportunity

Commercial real estate is the third largest asset class after equities and fixed income. Yet individual investors on average have a negligible allocation1 in their portfolios, significantly lower than institutional investors.

Attractive Risk-Return Profile

Private real estate can drive meaningful income generation and capital appreciation and can also offer a hedge against inflation2, as well as a low correlation3 to stocks and bonds.

Where You Invest Matters

Sector and manager selection are critical. To benefit from private real estate’s opportunities, important considerations include asset quality and growth potential.

Kathleen McCarthy and Ken Caplan, Global Co-Heads of Blackstone Real Estate, discuss the fundamentals of private real estate, key strategies and access to the asset class, along with Blackstone’s investment approach.

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Understanding Private Real Estate

Private real estate focuses on commercial, income-generating properties across a wide range of assets from warehouses and multifamily housing to office, hotel and retail. It excludes the for-sale residential market of both new and existing homes.

Data Centers

Industrial

Rental Housing

With more than 90% of commercial real estate privately owned,4 the private opportunity set is several multiples the size of publicly traded real estate. Yet individual investors on average hold considerably less than 3% of commercial real estate in their portfolios1 — due in part to a historic lack of access and a need to better understand where to invest. This underallocation by individual vs. institutional investors is now changing.5

Private Markets Are the Primary Way to Invest in Commercial Real Estate
US Commercial Real Estate4

Individual Investors Are Significantly Underallocated
Average Allocation to US Commercial Real Estate6

Why Private Real Estate?

For decades, individual investors have accessed income-producing real estate through public REITs, yet private real estate has historically had a more attractive risk-return profile, with portfolio diversification benefits such as low correlation to stocks and bonds.7

Private real estate can be a steady source of income for investors, for example in the US, a +4% annual yield for 17 out of the last 20 years and never less than 3%.8 Additionally, private real estate’s income has generally outpaced inflation.9

US Real Estate Income Has Generally Outpaced Inflation10
Indexed, 1996 = 100

Real estate’s low correlation to stocks and bonds may provide significant portfolio diversification benefits.7

Diversifying with Private Real Estate11
Correlations 2003-2022

Private real estate has historically been characterized as having relatively attractive returns while exhibiting significantly lower volatility than public REITs or equities.

Attractive Risk-Return Profile12
By Asset Class 2003-2022, Annualized

Where You Invest Matters

When investing in private real estate, selecting the right sectors, markets and assets can be critical to generating strong performance. It is important to focus on high-quality assets with outsized growth potential driven by long-term, secular tailwinds.

This means identifying and concentrating capital around major trends, such as the rise of e-commerce,13 a structural undersupply in housing,14 or the growth in cloud computing and artificial intelligence.15

Manager selection is also critical to success. Blackstone is the world’s largest owner of commercial real estate with a 30+ year track record, serving individual and institutional investors alike.16

Not All Real Estate Is Created Equal
Cumulative Performance (2008-2022)17

Not all real estate is created equal. Where you invest matters — if you invest in the right sectors even in a more challenging rate environment, you can have a differentiated outcome.

Jonathan Gray

President and Chief Operating Officer of Blackstone

Unlocking Value Through Private Market Ownership

Private real estate managers may have greater flexibility than public REITs to invest in areas of highest conviction and execute on complex transactions given they are less subject to public market forces. Managers in private markets can more easily drive long-term value- creation opportunities, whereas public market participants may face pressure to achieve predictable quarterly earnings.

A CASE STUDY

High Conviction, Thematic Investing: QTS Data Centers

Capitalizing on Surging Growth in Data Creation18

The privatization of QTS Realty Trust, a ≈$10b data center public REIT, exemplifies Blackstone’s commitment to high conviction thematic investing, capitalizing on long-term trends in data growth. In fact, more data was created in the three years from 2020 to 2022 than in all of history combined.18

Just as e-commerce drove demand for warehouses, cloud computing, content creation and now artificial intelligence are driving the surge in data creation and consumption. Blackstone views the rise of artificial intelligence as a once-in-a-generation engine for future growth in data centers and is committed to unlocking the full power of QTS’ platform through private ownership.

Read the complete Essentials of Private Real Estate

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Essentials of Private Markets

Learn how assets such as private real estate, credit and equity can fit into investment portfolios.

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  1. The “Individual Investor” figure is derived from Bain & Company, “Global Private Equity Report 2023.” The individual investor allocation of less than 3% represents a total private market allocation including real estate.
  2. Private real estate has historically outpaced inflation during inflationary periods. Any investment involves a high degree of risk and should only be made if an investor can afford the loss of the entire investment.
  3. Private real estate’s returns have historically been largely uncorrelated to that of global stocks, global investment grade bonds and global public REITs. Any investment involves a high degree of risk and should only be made if an investor can afford the loss of the entire investment.
  4. NAREIT, June 30, 2021, “Estimating the Size of the Commercial Real Estate Market.” ”Public” is the aggregate of all public REITs that are tracked by the NAREIT Total Industry Tracker.
  5. “State of the Market: Non-Traded REITs and BDCs” (July 2022), UMB Fund Services.
  6. Hodes Weill & Associates and Cornell Baker Program in Real Estate, Cerrulli Associates, December 31, 2022. The “Public Pension” and “Endowment” figures are weighted average target allocations and come from the 2022 Institutional Real Estate Allocations Monitor. The “Individual Investor” figure is as per Bain & Company, “Global Private Equity Report 2023”. <3% represents the total private market allocation including real estate.
  7. Diversification does not ensure a profit or protect against losses.
  8. NCREIF, 20-year period ending December 31, 2022. Reflects the NFI-ODCE Index. Represents Blackstone’s view of the current market environment as of the date appearing in this material only. Past performance does not predict future returns.
  9. There can be no assurance that any Blackstone fund or investment will be able to effectively hedge inflation, implement its investment strategy, achieve its investment objectives or avoid substantial losses. Private real estate is represented by the NFI-ODCE and reflects total returns excluding management and advisory fees. It is not possible to invest in an index.
  10. Net operating income (“NOI”) reflects Green Street Advisors data, as of December 31, 2022. 2022 NOI growth represents year-end estimate as of January 19, 2023. US CPI reflects Bureau of Labor Statistics data, as of December 31, 2022. NOI growth represents the average NOI growth by year across the equal-weighted average of the asset-weighted average of the multifamily, industrial, mall, office and shopping center sectors. Multifamily refers to apartment; shopping center refers to strip retail. The Consumer Price Index (CPI) measures changes in the prices paid by urban consumers for a representative basket of goods and services. NOI may not be correlated to or continue to keep pace with inflation. Past performance does not predict future returns.
  11. Morningstar Direct, NCREIF, 20-year period ending December 31, 2022. Represents Blackstone’s view of the current market environment as of the date appearing in this material only. Diversification does not assure a profit or protect against a loss in a declining market. Indices are meant to illustrate general market performance. Comparisons shown are for informational purposes only, do not represent specific investments and are not a portfolio allocation recommendation. Correlation measures how one investment performs in relation to another, with a coefficient of +1 being a perfect, positive correlation and a coefficient of -1 being a perfect, negative correlation. When two asset classes have a correlation of +1, they will both move up or down by the same amount in the same direction. Conversely, a correlation of -1 indicates that when one asset class moves up or down, the other moves in the opposite direction by the same amount. In general, asset classes with a correlation of less than 0.70 or greater than -0.70 are considered to have relatively low correlation. US Private Real Estate is represented by the NFI-ODCE Index. Global Equities are represented by the MSCI ACWI Index, including dividends. Global Investment Grade Bonds are represented by the Bloomberg Global Aggregate Bond Index. Global Public REITs are represented by the MSCI World Real Estate Index.
  12. Morningstar Direct, NCREIF, as of December 31, 2022. There can be no assurance that any Blackstone fund or investment will be able to implement its investment strategy, achieve its investment objectives or avoid substantial losses. Indices are meant to illustrate general market performance. Comparisons shown are for informational purposes only, do not represent specific investments and are not a portfolio allocation recommendation. An investment in a yield-oriented US Core+ Strategy for income-focused individual investors (the “Strategy”) has material differences from a direct investment in real estate, including related to fees and expenses, liquidity and tax treatment. The Strategy’s share price is subject to less volatility because its per share NAV is based on the value of real estate assets it owns (which may fluctuate and may be worth less than initial price) and is not subject to market pricing forces as is the price of the indices presented. The Strategy shares are significantly less liquid than publicly traded REITs and may fluctuate. US Private Real Estate is represented by the NFI-ODCE and reflects total returns excluding management and advisory fees. Global Public REITs are represented by the MSCI World Real Estate Index. US Equities are represented by the S&P 500 Index, including dividends. Global Equities are represented by the MSCI ACWI Index. US Investment Grade Bonds are represented by the Bloomberg US Aggregate Bond Index. Global Investment Grade Bonds are represented by the Bloomberg Global Aggregate Bond Index.
  13. U.S. Census Bureau, as of June 30, 2023. E-commerce growth represented by the increase in e-commerce sales from the year ended December 31, 2015 to the trailing one-year period ended June 30, 2023.
  14. Freddie Mac, as of December 31, 2020, released May 7, 2021.
  15. International Data Corporation (IDC), as of December 31, 2021. Growth in cloud computing and artificial intelligence represented by 49x increase in data creation in the last three years than in all of history combined. Three year increase in data creation represented by data created, consumed and stored measured in zettabytes. 2021 and 2022 represent year-end estimate.
  16. World’s largest owner of commercial real estate based on estimated market value per Real Capital Analytics as of June 30, 2023.
  17. Past performance does not predict future returns. Green Street Advisors, as of December 31, 2022. Based on the Green Street Commercial Property Price Index, which captures the prices at which US commercial real estate transactions are currently being negotiated and contracted. Reflects percent change by property sector from January 2008 to December 2022. Shopping Centers and Malls are sub-categories of “Retail.”
  18. IDC, as of December 31, 2021. 2021 and 2022 represent year-end estimate.

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