Private Equity Real Estate Definition
Private Equity Real Estate refers to the allocation of equity capital to directly acquire investment real estate with the goal of benefiting from cash flow and value growth potential. The term also refers to the contribution of debt capital to provide leverage in the acquisition or refinancing of real estate.
In the past, investing in commercial real estate was mostly reserved for sophisticated investors, because of the perceived complexity involved in managing the brick-and-mortar assets. Nowadays, a growing number of private investors are adding commercial investment property to their portfolios, because of the inherent benefits it provides, including Cash Flow, Cost Recovery, Equity Growth, and Inflationary Hedging. In fact, even those investors whose portfolios are mostly made up of securities, are now beginning to understand that owning and actively trading well-managed commercial investment properties is becoming a required component of true portfolio diversification.
Types of Investors
Private equity real estate investors include a diversified array of private accredited and non-accredited individual investors and institutional investors. Individual investors include fully accredited investors, meaning those who meet the minimum income and net worth requirements established by the Securities and Exchange Commission (SEC), and non-accredited investors who although may not meet those minimum income and net-worth requirements, nonetheless have the financial means to participate in private equity real estate investment. Institutional private equity real estate investors are mostly defined as professionally managed organization, including foundations, family offices, insurance companies, pension and endowment funds, real estate development companies, and other private investment groups. Both Individual and Institutional private equity real estate investors acquire and manage investment property either by relying on their own in-house staff to procure and operate their holdings, or by outsourcing the advisory and representation to an investment real estate brokerage firm that will handle the entire ongoing process.
Private equity real estate property types consist of a variety of asset categories and classes, including Class A, B, or C Office, Retail, and Industrial properties, which are all geared towards corporate users in both service and manufacturing industries. Other private equity investors prefer to acquire properties with a focus on residential and hospitality such as Multifamily Apartment Buildings, Hotels, and Resorts. Yet other investors have a more unique appetite and invest their private equity in specialty assets such as Marinas, Self-Storage, and Data Centers.
Private Equity Real Estate Risk Tolerance
Private Equity Real Estate investing is further categorized by the investors risk tolerance and targeted return on investment. There are three specific investment categories:
Opportunistic properties are defined as high-risk / high-return. These property types require a high degree of improvements and include vacant land for development, and specialty properties with niche uses where end-users will pay a premium to lease or purchase once enhancements are completed.
Value Added properties are defined as medium-to-high-risk / medium-to-high-return. These property types are best defined as either mismanaged or mispositioned property, whereby improving them in some manner, such as restructuring them financially or making reasonable physical improvements, will result in adding value.
Stabilized properties, also known as “Core” properties, are defined as low-risk / low-return with predictable cash flows. These properties require no further improvement at the time of acquisition and are basically turnkey. Although they are considered to have a lower return on investment than Opportunistic or Value-Add assets, these Stabilized properties are attractive because they tend to be occupied by quality credit rated corporate tenants. Private equity investors will benefit from stable income and either limited or no management responsibilities.
The Private Equity Real Estate market is as diversified as its participating investors and property types. By nature, private equity real estate appeals to investors of varying risk tolerances and experience and allows them to amass a real estate portfolio that can be used towards building generational wealth.
Irving J. Diaz is a seasoned commercial real estate advisor and broker with thirty (30) years of experience (Since 1993). He is a subject-matter expert involving a variety of commercial property asset classes and has represented a wide range of clients, including developers, investors, and corporate occupiers.
Entrepreneurial by nature, Irving is the founder and managing principal of Diaz Commercial, a real estate investment sale and space leasing firm headquartered in South Florida and servicing the Miami-Fort Lauderdale market. He has spearheaded countless assignments involving commercial real estate acquisitions and divestitures, corporate occupier representation, capital market placements, and commercial property development. His experience has also earned him litigation support roles in commercial real estate cases, including serving as a valuation adviser to legal counsel and testifying as an expert witness in court.
Having graduated from Florida International University, Irving holds a Bachelor of Business Administration (BBA 99') with a major in Decision Sciences. He is a Certified Commercial Investment Member (CCIM), a Florida licensed real estate broker, and is fluent in English and Spanish.