'Location' isn't the only concern for advisors recommending real estate to clients

The mantra for real estate investors has always been “location, location, location.” In the post-pandemic property environment, however, financial advisors are also increasingly being forced to choose between “public" and "private.”

The iShares US Real Estate ETF (IYR), which tracks publicly traded REITS, has taken a roller coaster ride to nowhere so far in 2023, returning a mere 2.2% while the S&P 500 is up almost 18%. Of course, the IYR, which currently yields 2.88%, continues to be weighed down by commercial real estate worries.

For those intent on seeking the stable returns that property investments have historically provided, the volatility in publicly traded real estate stocks now begs the question as to the best way to allocate to that sector. And it’s an especially significant choice now that investors can easily jettison their real estate holdings entirely in favor of steadier, and safer, yield plays like the two-year Treasury note, currently yielding a healthy 4.7%.

“When we think about public versus private, it really comes down to what type of investor you are,” said Bernie Wasserman, president of Participant Capital, a private equity real estate investment firm. “I think when you look at REITs, you have to be a bit sensitive. You have to be much more of a stock picker than an index buyer. We like private because the investment horizon is longer, you're not pressured to allocate capital. You can be a little bit pickier, a little bit more selective.”

As to where Wasserman is finding the best deals, he says Florida continues to be a hot spot for development, particularly the Miami metro area, with Tampa and Orlando not far behind.

“We find capital still available for multifamily and that has been all the more interesting today because it's not as hard to finance," he said. "There's a lot of lenders out there and migration has been quite strong coming to the area.”

Amanda Teeple, partner at Alliance 160, says investment portfolios continue to be underexposed to real estate. In her view, the continual improvement in the structure of real estate products in the years since the financial crisis has enabled more investors to benefit from the addition of the asset class to their portfolios. 

“There are now plenty of opportunities for investors to access real estate, from a hands-in-the-dirt, cash-intensive flipping strategy to investing in a publicly traded REIT with no minimums and liquidity, to everything in between, including the publicly registered nontraded NAV REITs that are so popular today,” Teeple said.

As to how advisors might better support their clients with their real estate allocations, whether they're public or private, Teeple strongly believes the best way is to keep it simple. 

“Even the simplest of strategies can go a long way in real estate investing, and studies have shown that even allocating as little as 5% of a portfolio to real estate lends to greater returns and comes with fewer risks than a traditional equity and bond portfolio,” she said.

LOCATION, LOCATION AND DIVERSIFICATION, TOO

Even if the Florida real estate market is literally and figuratively hot, the lingering unknowns in the real estate market make it imperative to prioritize risk controls when investing in such properties. And the best way to reduce risk in the stock market also applies to real estate — good old-fashioned diversification.

“We advocate for a prudent approach by investing alongside experienced institutional managers that offer diversified fund exposure to private real estate, reducing concentration risk in a single deal,” said Steven Brod, CEO of Crystal Capital Partners.

Brod said deep value opportunities may emerge within credit cycles like the current one, as sound fundamentals align with faltering debt capital structures. He also sees off-market solutions supported by "trusted capital partners presenting themselves in the form of rescue financing," which will eventually benefit both borrowers and lenders.

“Through our discussions with the institutional managers we work with, we've observed that their portfolios encompass a blend of opportunistic real estate investments, performing real estate debt investments, as well as income-generating real estate investments. This holistic approach positions investors to leverage the evolving real estate landscape to their advantage,” he said.

Wasserman agrees with this diversified approach, saying financial advisors should avoid showing their clients direct deals, which even seasoned professionals can have trouble deciphering.

“Go with the fund manager that tries to align their interests in terms of their risk tolerance and their appetite for real estate,” he said.