BlackRock on the Future of Private Market CRE Investing

As BlackRock recently released its outlook on private markets—still attractive risk premiums that can offer portfolio resistance—some of its general observations have relevance to commercial real estate.

BlackRock discusses the 3Ds of decarbonization, digitalization, and decentralization. Moving from fossil fuels, the transformation of the digital world, and distribution of infrastructure control has relevance to CRE.

“For real estate markets, the 3Ds of infrastructure are similarly applicable, while we see several additional drivers at work,” the report says. “In particular, the wide and sustained divergence in performance between the winners (sheds and beds) and losers (hotels and retail) are likely to be sustained for now, providing considerable scope for alpha from sector selection. At the same time, distressed and dislocated real estate segments are starting to show signs of deep value, although these opportunities need on-the-ground, off-market sourcing capabilities to unlock.”

One aspect is a growth in digital technology in areas like resident and industrial that received a supercharge from the “age of Covid.”

“We believe that exposure to these trends is an important element of future private market returns, particularly in a world where forward returns are more challenged,” the report notes. Exposure could be either to properties and investments making use of technology for more effective operation and innovative options, or, for that matter, investment in the tech companies themselves, like the way WeWork co-founder Adam Neumann has invested both in apartments and tech firms. 

Changing life patterns are affecting many industries, including CRE. “Logistics and residential are two high-performing areas,” as the report notes, but this is far broader than more e-commerce driving industrial and senior housing needs expanding with an aging population. “[W]e see demand for property evolving as tenants look for sustainably engineered buildings. While asset-specific factors will continue to dominate and drive returns, looking across real assets, investors may also benefit from inflation-linked returns (albeit we expect inflation to remain within an acceptable range).”

Investors also see ESG—environmental, social, and governance—as an increasingly important consideration. 

“Anticipating the pathway [to decarbonization] is the key to investment success, and requires a solid understanding of policy, innovation, cost and resilience across power, transportation, industry, real estate and agriculture. The transition will be uneven, with regional and sector opportunities.”