Private real estate:

Opportunity for income and diversification

Executive summary

Real estate is an essential component of diversified

portfolios, offering potential for high and stable

income, capital appreciation, inflation protection and

diversification. Two categories—private real estate and

listed real estate investment trusts (listed REITs)—have

differing characteristics and roles in asset allocation.

U.S. private real estate and listed REITs improved the

performance and diversification of traditional stock-bond

portfolios over a 20-year time period, 2000-2020. U.S.

private real estate produced better risk-adjusted returns

than listed REITs, reflecting its lower volatility.

Combining private real estate and listed REITs improved

risk-adjusted returns, reflecting their low correlations.

Listed REITs play a key role in providing liquidity to

support portfolio rebalancing or redemptions,

compensating for private real estate’s illiquidity.

Overall, private real estate can offer a greater potential to

diversify multi-asset portfolios and reduce downside risk,

based on its record of higher risk adjusted returns, lower

volatility and lower correlations, compared to listed REITs.

Why invest in real estate?

Real estate is a fundamental building block of investment

portfolios, providing ballast against the uncertainty of

stock market returns, rising interest rates and inflation.

At a time when investors are starved for yield, real estate

provides high income with stability borne of long-term lease

contracts. Moreover, real estate’s long-term growth potential

benefits from megatrends, such as aging populations,

urbanization and technological innovation. Still, investors

often lack understanding of real estate investments. For

example, many investors confuse private real estate and

listed real estate investment trusts (listed REITs)—two

types of real estate exposure with different risk-return

characteristics. Listed REITs have offered less stability than

private real estate because they are publicly traded and

subject to the broad stock market’s volatility. Moreover,

many investors lack exposure to the benefits of private

real estate. Although 57% of 403(b) retirement plans offer

a real estate investment option, the vast majority are listed

REITs and relatively few plans offer private real estate.

This paper explains key differences that account for private

real estate’s particular advantages for diversifying risk in

multi-asset portfolios.

Comparing private real estate and

listed REITs

Private real estate—a distinct asset class separate

from stocks and bonds—represents direct ownership of

high-quality commercial property in four primary categories:

offices, apartments, retail and industrial.

Listed REITs,

a category of stocks, are issued by companies that own

and manage pools of commercial property. Both represent

large markets rich in opportunity, with listed REITs valued

at more than $1 trillion and private real estate at more

than $700 billion in two leading U.S. indexes (Exhibit 1).

Exhibit 1: Private real estate and listed REITs

represent large markets

$701B

$1,184B

U.S. private real estate

(NCREIF Property Index)

U.S. REITs

(FTSE NAREIT U.S. Real Estate Index)

Data as of December 2020. The following indexes are represented: U.S.

private real estate (NCREIF Property Index, or NPI), U.S. equity listed REITs

(FTSE NAREIT U.S. Real Estate Index). It is not possible to invest in an index.

Performance for indices does not reect investment fees or transaction costs.

Sources: NCREIF, FTSE Russell.

Private real estate: Opportunity for income and diversification

Key differences

Returns

Private real estate returns historically have been competitive

with listed REITs, bolstered by a premium compensating

investors for illiquidity. Returns for both categories tend to

be more stable over market cycles because income from

long-term leases represents a larger proportion of total

returns, compared to other asset classes. As a result, the

income yield for private real estate and listed REITs has

tended to be higher than investment-grade bonds.

Volatility

Private real estate volatility has been significantly lower

than listed REITs and other stock categories, producing a

record of higher risk-adjusted returns.

The lower volatility

is due to its illiquidity with infrequent trading and valuations

determined by periodic appraisals. Listed REITs’ higher

volatility largely reflects broad stock market sentiment and

investment flows, although higher leverage is also a factor.

Liquidity

Listed REITs can play an essential role in providing liquidity

to support portfolio rebalancing, compensating for private

real estate’s illiquidity. Private real estate investment funds

used in DC plans generally include allocations to listed

REITs, other liquid investments and cash for liquidity to

support participant redemptions.

Diversification benefits

Diversification benefits, which help to manage risk, are

a primary reason for including real estate in multi-asset

portfolios. As a distinct asset class, private real estate has

a different risk-return profile than stocks and bonds. Factors

include high and stable income, illiquidity and infrequent

trading that reduce volatility. This is clearly reflected in

Exhibit 2, showing low or negative historical correlations

with stocks and bonds, 0.14 and -0.12, respectively. As a

result, private real estate is less likely to suffer losses at

the same time or to the same degree as stocks, helping to

reduce downside risk in a multi-asset portfolio.

Although

publicly traded, listed REITs’ correlations also have been

relatively low with stocks and bonds, 0.68 and 0.04,

respectively. Combining private real estate and listed REITs

may provide additional diversification benefits based on

their record of low correlations to each other, 0.27. The low

correlations reflect differences in how quickly market prices

can be updated and the amount of leverage.

Exhibit 2: Correlations between U.S. real estate,

bonds and stocks (2000-2020)

U.S.

Private real

estate

Listed

REITs

Stocks Bonds

Private real estate

Listed REITs 0.25

Stocks 0.14 0.68

Bonds -0.12 0.04 -0.34

Data as of December 2020. Indexes represented: Private real estate (NCREIF

Fund Index–Open End Diversified Core Equity (NFI–ODCE), REITs (FTSE NAREIT

U.S. Real Estate Index), U.S. stocks (S&P 500 Index), U.S. bonds (Bloomberg

Barclays U.S. Aggregate Bond Index). It is not possible to invest in an index.

Performance for indices does not reflect investment fees or transactions costs.

Source: MacroBond.

Inflation hedging

Private real estate and listed REITs provide a natural hedge

against inflation with commercial rents and property values

highly correlated with rising prices. Exhibit 3, for example,

shows that U.S. private real estate’s net operating income

(NOI) has closely tracked increases in the consumer price

index

since 2004 and exceeded it since 2013.

Exhibit 3: Real estate net operating income

(NOI) has outpaced inflation since 2013

U.S. Private real estate income and inflation growth

100

110

120

130

140

150

160

170

180

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

— U.S. Real Estate Net Operating Income — U.S. Inflation

Data as of December 2020. U.S. private real estate net operating income

(NOI) is based on the NCREIF Fund Index–Open End Diversified Core Equity

(NFI–ODCE). U.S. inflation data reflect the Consumer Price Index For All Urban

Consumers (CPIU). Sources: NCREIF, Moody’s Analytics.

Private real estate: Opportunity for income and diversification

Comparing index performance: Private real

estate vs. listed REITs

This section compares the performance and diversification

benefits of U.S. private real estate and listed REITs using

index data for the 20-year period, 2000-2020. We show the

benefits of combining the two categories using 80% private

real estate and 20% listed REITs—an allocation designed

to provide additional liquidity and diversification. Private

real estate is represented by NCREIF Fund Index–Open End

Diversified Core Equity (NFI–ODCE) representing lower-risk

investments in U.S. operating properties across regions and

property types. Listed REITs performance is represented by

FTSE NAREIT U.S. Real Estate Index covering equity REITs

across sectors.

Performance summary

(20-year period 2000-2020)

U.S. private real estate exhibited slightly lower absolute

returns than listed REITs, 8.1% vs. 11.6%, with lower

volatility, 8.4% vs. 21.6% (Exhibit 4).

As a result of lower volatility, private real estate’s

risk-adjusted returns were higher, 0.78 vs. 0.43,

based on Sharpe ratio.

Combining the two categories in an 80%/20% split

improved performance due to their low correlations.

Absolute returns increased and volatility declined,

producing higher risk-adjusted returns, 0.83.

Low correlations between the two categories, 0.27,

provided diversification benefits that contributed to

improved performance.

Exhibit 4: Private real estate offered better

risk-adjusted returns than listed REITs.

Private

real estate

REITs

80% private real

estate/20% REITs

Total returns

(average annual)

8.1% 10.7% 9.0%

Volatility

(standard deviation)

8.4% 21.6% 9.0%

Risk-adjusted returns

(Sharpe Ratio)

0.78 0.43 0.83

Data for the period January 1, 2000-December 31, 2020. The indexes

represented are as follows: U.S. private real estate (NCREIF Fund Index–Open

End Diversified Core Equity (NFI–ODCE), listed REITs (FTSE NAREIT U.S.

Real Estate Index). Performance over different time periods may have been

less favorable than shown above. It is not possible to invest in an index.

Performance for indices does not reflect investment fees or transaction costs.

Source: MacroBond.

Conclusions

Private real estate is a distinct asset class offering

powerful diversification benefits, based on its record

of higher risk-adjusted returns and lower volatility

than stocks, and higher, more stable income than

investment-grade bonds.

Investors should understand the important differences

between private real estate and listed REITs, which

represent a subcategory of stocks. With lower volatility,

private real estate historically has provided better

risk-adjusted returns. Listed REITs can play an

essential role in providing liquidity to support portfolio

rebalancing or redemptions, compensating for private

real estate’s illiquidity.

Combining private real estate and listed REITs can

improve portfolio diversification, based on their history

of low correlations.

Adding private real estate to multi-asset class portfolios

offers greater potential to improve the overall risk-return

profile and reduce downside risk, compared to adding

listed REITs.

For more information, visit TIAA.org or contact your TIAA representative.

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2018 403(b) Plan Survey, Plan Sponsor Council of America.

Additional private real estate subcategories include student housing, senior housing and data centers.

Past performance is not a guarantee of future results.

Private Market Real Estate Investment Options for Defined Contribution, Aon Hewitt, November 2019.

Consumer Price Index For All Urban Consumers (CPI-U) measures changes in the price of a basket of goods and services purchased by

urban consumers.

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for

investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors and held in

a fiduciary environment.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the

index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured

by real property.

Risks and other important considerations

Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss.

This material is presented for informational purposes only and may change in response to changing economic and market conditions. This material

is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in

a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or

suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and

exercise independent judgment with respect to their clients. Certain products and services may not be available to all entities or persons.

Past performance is not indicative of future results. Performance results are not intended to represent any TIAA investment or predict future

investment performance. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive

performance over any period of time.

Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected,

currency movement risks and potential environmental problems and liability.

Equity investing involves risk. Foreign investments are also subject to political, currency and regulatory risks. Fixed-income investments are

subject to market, interest-rate and credit risks.

TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributes securities products.