Leveraged Breakdowns

The Five “Food Groups” of Real Estate Investment

Real estate assets are  divided into three major types: Residential, commercial, and industrial. NAREIT (National Association of Real Estate Investment Trusts) tracks a dozen main property types in investment real estate and provides data on the returns realized in those property types (and several sub-types). Most REPE funds, however, focus on one of the five most common property types or “food groups”: industrial, retail, office, multifamily, and healthcare.

Industrial

Industrial properties include manufacturing, logistics, and storage. Most manufacturing firms own their real estate (referred to as “owner-occupied”). Warehouses and distribution centers are often rented, creating an opportunity for private equity firms to own the real estate and generate positive returns by leasing the space to one or more tenants.

Retail

Retail real estate is perhaps one of the most familiar asset types, and currently one of the most out-of-favor. The combination of consumer tastes eschewing enclosed malls with the rise of online shopping have stressed this sector in recent years. It also makes for an intriguing real estate investment case study in perception and reality). Retail assets are generally broken into sub-types of regional malls, shopping centers (often anchored by a major grocery store and sometime called “neighborhood shopping centers”), and free standing. Free standing means there is only one tenant on the parcel- think of a Taco Bell, CVS, Dollar General, or an O’Reilly Auto.

Office

Office properties range from midtown Manhattan skyscrapers to office parks in the suburbs. Occupancy types span from a single tenant in a building to multiple tenants. Similar to  multifamily properties, multi-tenant office properties are more management intensive and generally involve shared amenities like reception areas, shipping and receiving, and employee break rooms or lounges.

Multifamily

Multifamily is commonly understood as any residential property consisting of more than 4 separate dwelling units. Most federal agencies and lenders classify residential real estate as either “1-4 family” or “multifamily,” based on the number of dwelling units. Multifamily may also include senior housing, particularly independent living or age-restricted living (55+) facilities. Multifamily properties generally include some type of on-site management to handle repairs and maintenance, upkeep and cleanliness, and have amenities like a pool, fitness facility or clubhouse.

Healthcare

Healthcare real estate generally divides into three main sub-types: hospitals, medical offices, and seniors housing. Hospitals include traditional acute care facilities, surgical hospitals, and specialty hospitals. Medical office may be multi- or single-tenant, and is also classified in terms of “on-campus” or “off-campus” (campus referring to an acute care hospital- so either “on the campus of a major hospital” or not). Seniors housing encompasses for-profit independent living, assisted living, memory care, and skilled nursing.

Sector Investing in Real Estate

Private equity firms delineate their investment funds into these five primary sectors or property types because most investors seek exposure to particular property types. Investors have reviewed real estate investment case studies and fund prospectuses and believe that certain property types will achieve returns that help balance and diversify their overall portfolio. Segregating private equity real estate returns by property type is most useful to investors.

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