Investors are pondering hard on COVID-19’s impact on private real estate, what actions are advisable now and what their portfolio positioning should be going forward. We recommend the multifamily and industrial sectors as core assets in an institutional investor’s portfolio. These asset classes have lower ongoing capital needs, are well-positioned to provide rental growth and typically have bounced back quickly following downturns.
Direct real estate is an important part of most institutional portfolios as it offers strong long-term returns, current income, inflation protection, diversification from equity returns and lower beta compared with publicly traded real estate investment trusts (REIT). A typical US endowment or pension has approximately 5%-10% of its portfolio allocated to private real estate. 1
While many publicly traded REITs have declined by more than 20%, 2 the impact of the current environment on direct real estate is less transparent given a lack of direct properties that have traded since the beginning of the pandemic. However, now that April rents have been largely collected, we can begin to better understand how various property types are performing. Figure 1 summarizes the relative severity of COVID-19’s impact on each of the major real estate sectors. Obviously, there will be significant variances based on location, tenant quality and the specific characteristics of each property.