The Five Major “Food Groups” of Real Estate Investment

Real estate as an asset class is divided into three major types: Residential, commercial, and industrial. NAREIT (National Association of Real Estate Investment Trusts) tracks twelve main property types in investment real estate and provides data on the returns realized in those property types (and several sub-types). Most real estate private equity funds, however, focus on one of the five main property types or “food groups”: multifamily, industrial, retail, office, and healthcare.

Multifamily

Multifamily is defined as any residential property consisting of more than 4 separate dwelling units. Many federal agencies and most lenders classify residential real estate as 1-4 family or multifamily, based on the number of dwelling units. In many instances, multifamily may also include senior housing, particularly free standing independent living or age-restricted living (55+). Multifamily properties generally include some type of on-site management to handle repairs and maintenance, upkeep and cleanliness, and have some type of amenities like a pool or clubhouse.

Industrial

Industrial properties involve manufacturing, storage, and logistics. Most manufacturing firms own their real estate (“owner-occupied”). Warehouses and distribution centers are often rented, creating opportunities for private equity to own the real estate and generate positive returns by leasing the space to one or more tenants.

Retail

Retail real estate is perhaps one of the most familiar asset types, and currently one of the most maligned. The combination of enclosed malls falling out of favor with the rise of online shopping have stressed this sector in recent years (and makes for a fascinating real estate investment case study in perception and reality). Retail is generally broken into sub-types of regional malls, shopping centers (often anchored by a major grocery store), and free standing. Free standing means there is only one tenant on the parcel- think of a McDonalds, Walgreens, Dollar Tree, or an AutoZone.

Office

Office properties range from downtown skyscrapers to suburban office parks. Occupancy types span from a single tenant in a building to multiple tenants scattered throughout. Much like multifamily, multi-tenant office properties are more management intensive and generally involve shared amenities like reception, shipping and receiving, and break rooms or lounges for employees.

Healthcare

Healthcare real estate divides into three main sub-types: hospitals, medical offices, and senior care. Hospitals may include traditional acute care facilities, surgical hospitals, or specialty hospitals. Medical office may be single- or multi-tenant, and is also discussed in terms of on-campus or off-campus (campus referring to an acute care hospital- so either “on the campus of a major hospital” or not). Senior care encompasses for-profit assisted living, memory care, and skilled nursing.

Real Estate Sector Investing

Private equity firms segregate their investment funds into these primary sectors or property types because investors seek exposure to particular property types. These investors have reviewed real estate investment case studies and believe that certain property types will achieve returns that help balance and diversify their overall portfolio. Private equity real estate returns are most meaningful to investors when property types are segregated.