Investment experts, including those in the academic and consulting communities, often view commercial real estate as a fundamental asset class along with equities, bonds and other assets that should be included in all investment portfolios. For example, many defined benefit plans have for years invested in real estate for portfolio diversification, income and inflation protection. In recent years, however, more and more retirement savings assets have moved from defined benefit plans to defined contribution plans and individual retirement accounts. Today, approximately two-thirds of retirement savings are invested through such accounts.
Within the past few years, the defined contribution market has seen a dramatic increase in the use of commercial real estate within asset allocation products such as target-date and target-risk funds, products which have increasingly become the investment of choice for retirement plan participants. Evidence of this trend may be found in Callan Associates’ 2009 industry survey, which found that 73% of the target-date fund managers surveyed had a dedicated real estate allocation in their offerings. As recently as 2005, only a minority of target-date fund managers were investing in real estate. While some asset allocation products invest in real estate through direct investment products, most target-date and target-risk fund products provide real estate exposure through investments in publicly traded REITs because of their daily market pricing, low cost and liquidity.