SAN FRANCISCO—Many pension funds and other institutional investors allocate commercial real estate investment funds into the three property risk classifications of core, value-added and opportunistic and then into various markets and property types. Allocation into these risk classifications is necessary; however, it should be the second step in a more comprehensive allocation investment strategy.

A comprehensive investment allocation strategy should begin with the four quadrant approach to real estate investment. The four quadrant approach for CRE investment strategy was written by me in the summer 1995 issue of Real Estate Review magazine as well as others from Heitman Properties Ltd. and Property, Portfolio and Research during that time. The approach first allocates the total investable capital to CRE between the public and private real estate markets and then into debt and equity investments within each of those markets. The public CRE equity market is comprised of REITs and real estate operating companies (primarily hotel companies) and the private equity market includes all other non-public CRE investment programs including non-traded REITs, private equity funds, closed end funds, commingled funds and special account funds. The public CRE debt market is comprised of CMBS loans and the private debt market includes all private financing from banks, savings and loans, Wall Street, mortgage bankers and private lenders that issue first mortgage loans, subordinate loans, mezzanine loans, bridge loans and participating loans. A graphic representation of the four quadrant investment program is shown in Table I below:

Table I-Four Quadrant Investment Program