Navigating volatility through allocations to private real estate equity and debt

As markets continue to cycle through uncertainty, investors may be increasingly weighing trade-offs between liquidity and durability, income and appreciation. In this environment, commercial real estate—particularly through private debt and equity strategies—may be emerging as a dynamic tool for balancing these competing priorities.

This Q&A brings together insights from industry experts to explore how private real estate is evolving within portfolios. From the role of durable income and low correlation benefits to innovations in access and data, we’ll examine how private real estate may serve as both a stabilizer and a growth engine.

As investor preferences shift between liquidity and durability, or income and capital appreciation, how do you see the role of commercial real estate evolving within portfolios—and how do private debt and equity strategies help balance those competing priorities?

Charlie: We believe a diversified portfolio should include both real estate debt and equity as strategic asset classes through all cycles. Private real estate debt offers the potential for durable income as evidenced by high single-digit total returns over the past decade.¹ Today, private real estate debt provides attractive premium income potential,² and advances in semi-liquid structures are giving more investors greater flexibility to buy in over time and redeem out to rebalance their portfolio, compared to traditional closed-end vehicles.

Chase: On the equity side, we’re focused on durable income as the anchor of returns. If you look back historically, pre-COVID, income was the vast majority of the total return, and we see markets returning to that dynamic³. Appreciation is welcome, however, we’re not relying on cap rate compression. Income growth and stability remain the key drivers of performance.

Private real estate has historically shown low correlation with traditional equities, bonds, and even publicly listed real estate. What structural or behavioral dynamics do you believe will preserve that diversification benefit going forward?

Chase: We see low correlations⁴ as a key feature of the private markets, and we do not see that changing any time soon. Unlike public markets, private valuations track fundamentals more closely. The notion that price and value aren’t necessarily the same thing in public markets has traditionally been a benefit for us as active managers when we believe there is a disconnect between the two, which can be dramatic when there is volatility on the public side. For the most part, in private markets, value and price have corresponded more closely, which we believe is a positive for long-term investors.

Charlie: Private real estate markets have consistently evidenced lower volatility⁵ and historically negative correlations⁶ with global equities and bonds, leading to a compelling argument for their placement within traditional portfolios. With record-high maturities ahead, the opportunity for private real estate debt to step in as an alternative lender remains compelling. The diversification benefit has remained strong, and today we’re seeing significant interest in commercial real estate debt because its low correlation to public equities and fixed income has been so attractive over time.

What are your outlooks going forward for your asset classes? What are the biggest opportunities and risks that investors should consider?

Charlie: Private real estate debt is underinvested by institutions and yet represents the fourth-largest US fixed income asset class.⁷ With banks less active in the space, there is a very large, investable asset class with the largest single historical lender less active than they have been historically. Alongside high maturities, the elevated base rate environment is driving higher returns today than we have seen for most of the last 20 years. A risk is that potential macroeconomic headwinds, such as a shift in interest rates, might derail the green shoots we’re seeing on the equity side.

Chase: Real estate equity is coming off a three-year correction,⁸ with valuations stabilizing and modest appreciation returning as evidenced in major indices. We expect a smoother recovery than the rapid one post GFC, with active management and sub-sector selection critical for generating alpha. Private real estate has come into a modern age, in the sense that it’s more efficient, the competition is far stronger, and one needs to be a skilled operator, as it won’t just be about what a manager buys, it’ll be about what someone does when they own it. The relative value argument has been squarely in the credit camp for the past few years, however from how we are underwriting deals today, we believe that the opportunity is also with equity now. In our opinion, real estate equity selection should focus on properties aligned with long-term demand trends while avoiding key risks like physical obsolescence.

For investors seeking cycle-resistant, tax-efficient income, what role does private commercial real estate, both debt and equity, play within their portfolio?

Charlie: Real estate debt is inherently cycle resistant,⁹ benefitting from deep subordination from borrowers insulating the asset class from movement in underlying values. Tax efficiency for taxable investors is enhanced through REIT structures, which avoid double taxation and offer attractive dividend treatment for tax-sensitive investors, further enhanced by the reduction in headline tax rates on dividends post-2017 in the US.¹⁰

Chase: From an equity income standpoint, we find high-income sectors with low cyclicality very attractive—such as manufactured housing, healthcare, self-storage, and parts of retail. Properties that screen well to us have cap rates at or above the cost of financing, low capital expenditures relative to that cap rate, and low cyclicality from a demand standpoint. Real estate income returns on the equity side are cycle resistant. Even during the GFC, income returns were positive.¹¹

When building a long-term asset allocation, how should investors think about their exposure to real estate debt and equity to also align with different phases of the economic and property market cycles?

Charlie: We believe that over the long run, both private real estate debt and equity play critical roles in a diversified portfolio.¹² Both have low correlations to public markets, and each other, and are accordingly strategic diversifiers within a portfolio. We have seen this current environment serve an attractive entry point for real estate debt given the fact the underlying security, real estate, has just gone through a pull-back. In our view, investors that are now committing capital are starting at a trough point in the market, and elevated base rates are driving premium returns.

Chase: The equity market over the past few years has been a capital markets driven cycle, not a fundamental one. COVID was detrimental to a few sectors, like traditional office buildings and perhaps parts of the life science market, but for everything else, occupancy levels are above where they were pre-COVID.

What innovations or emerging themes—whether in investment vehicles, deal structuring, or data and analytics—are shaping how investors are approaching the private commercial real estate market today?

Charlie: We’re seeing democratization of access to private real estate through nontraded REITs, which has led to improved governance standards and transparency. We are also currently working on the first reliable benchmark for real estate debt with NCREIF and CREFC. We believe this will make real estate debt increasingly more attractive and investable to many types of investors over the long term.

Chase: The modernization of private markets is accelerating, particularly with individual investors entering. Within real estate equity, we believe that vertical integration, i.e., selecting, owning, and operating assets, can help deliver full value for investors. On the data side, having a cogent strategy — how we organize our own proprietary data, thirdparty data and how we take that data pool and translate it into our portfolios for decision making — is going to be critical for our investment teams.