Private Real Estate Capital Favors Big Four Asset Classes Over Alternatives: Report

It seems old money enjoys safe bets. 

A new report from NAREIT documenting 10 years of investment trends found that private real estate owners are far more likely to park their capital in four traditional asset classes — office, industrial, apartments and retail — compared to active managers, who prefer alternatives like data centers, hospitals and senior housing. 

The national real estate investment trust trade group tracked an index of National Council of Real Estate Investment Funds (NCREIF) Open End Diversified Core Equity funds — also known as ODCE funds — which is effectively a benchmark of privately managed real estate funds that holds a value of $272 billion. 

Nareit found that, between 2015 and 2025, private real estate funds allocated 90 percent of their capital into the big four asset classes (office, retail, industrial and multifamily), while active managers of public markets, notably REITs, allocated only 31 percent of capital into those same asset classes. 

“The shares of the index and active managers are similar for each property sector, but ODCE’s allocations are substantially different,” wrote Nicole Funari, vice president of research at Nareit. “While ODCE’s largest allocation is industrial at a 35 percent share, the index’s largest allocation is retail at 15 percent, and for active managers it is telecommunications at 17 percent.” 

The private funds tracked by ODCE work like this: On one hand, this index tracks private real estate bought and sold and invested in, like another type of investment sale, but it also examines the funds created by private owners and investors who aim to buy and sell real estate by sourcing private capital. Unlike public REITs, which source capital on the open market and issue dividends for the benefit of shareholders, these private funds merely source capital to fuel investment activity for their own benefit. 

No asset class has seen its share of capital allocations decline in the private fund world as much as the office sector. 

Back in 2015, the ODCE index invested 40 percent of its capital into office, while active managers allocated only 17 percent of investment capital into that space (the FTSE Nareit index — effectively an S&P 500 for the REIT public industry — marked office investment at 10 percent ratio to total market share). 

But from 2015 to 2025, private ODCE funds reduced their exposure to office by more than 50 percent (dropping from 40 percent share to 17 percent). At this same time, active managers reduced their exposure by dropping their office investment ratio more than 80 percent, according to Nareit. 

“Private real estate has continued to keep allocations to office relatively high while decreasing allocations to retail, in sharp contrast to listed real estate which has seen large decreases in office and varied allocations to retail with the market,” wrote Funari. 

Today, ODCE’s largest allocation is in the industrial sector, which holds a 35 percent share of investment capital, compared to active managers, which only invest 9 percent of capital in industrial, but 11 percent into retail and 69 percent into alternatives. These alternatives that active managers favor include hospitals, telecommunications towers, data centers, self storage, single family homes, and manufactured homes, among several others. 

OSCE funds allocate only 10 percent of capital into alternatives, with self storage being the most favored asset class among the different alternative sectors. 

Moreover, private funds have seemed to favor industrial and apartments over the last 10 years. 

Between 2015 and 2025, ODCE’s exposure to industrial property investment nearly tripled from 13 percent to 35 percent, while multifamily saw its share in ODCE funds rise from 25 percent to 28 percent. Retail had the opposed trend: ODCE investment share into retail fell from nearly 20 percent in 2015 to 10 percent a decade later.

Compare this to active managers, whose retail investment shares rose from 8 percent in the frist quarter of 2021 to 11 percent by 2025. 

“Even accounting for liquidity differences, private real estate appears to be following a different investment strategy from listed real estate active managers,” wrote Funari.  

Brian Pascus can be reached at bpascus@commercialobserver.com.