Savvy investors have always viewed real estate as an essential piece of a well-balanced and diversified portfolio. However, real estate is still commonly classified as an “alternative asset” (alongside commodities, infrastructure projects, and hedge funds) when it comes to a traditional investment model centered around core assets, like stocks and bonds.

In recent years, an increasing number of institutional investors – pension funds, endowments, etc. – have embraced real estate as a part of their core strategy in large part due to the protection it provides against inflation and the current yield it generates. In fact, institutional investors today allocate an average of 10.7% of their investment portfolios to real estate.

Below we make the case for classifying real estate as a traditional, core asset – and one that all investors should consider when building a successful portfolio.

Reason #1: Transaction Volume Exceeds $500B and Growing

Real estate is a commodity that’s all around us. From our homes to our workplaces to the stores we shop at, all aspects of our lives involve real estate. Globally, commercial real estate investment has continuously increased since the end of the financial crisis with 2013 sales exceeding $563 billion, a 21% increase from 2012.

Real estate’s presence within traditional markets continues to grow, as well. Market capitalization for REITs at the end of 2013 was more than $670 billion, nearly 7% of the total S&P 500 and up from 4.8% at the end of 2012.

Reason #2: Concrete Benefits - Increased Returns, Reduced Risk

Adding real estate to a portfolio does more than just add asset diversification, it also builds stability and strength. Beyond providing current cash flow and a range of tax incentives, real estate naturally appreciates in value over the long-term (in the short-term real estate tends to be cyclical with spikes and crashes), which can mean exponential growth for a portfolio, in addition to risk mitigation.

The following chart shows the difference between a portfolio with and without real estate:

Portfolio Comparison

Source: Ibbotson Associates via NAREIT (1972 - 2006)

Reason #3: Institutional Validation

In recent years, institutions have shifted towards large-scale investments in assets that aren’t traded on the public markets, real estate being one of the primary examples – and have seen dramatic success as a result.

One of the best-known case studies is the Yale Endowment. According to the Endowment, “investments in real estate provide meaningful diversification to the Endowment. A steady flow of income with equity upside creates a natural hedge against unanticipated inflation without a sacrifice of expected return.”

Since the hiring of Chief Investment Officer David Swensen in the early 1990s, Yale has seen twenty-fold growth. According to Swensen, “Yale’s portfolio was overly conservative and under-diversified…highly exposed to domestic equities and fixed-income securities.” Swensen decided to shift asset allocation towards riskier classes and saw that the additional returns compensated for the increase in market risk – and led to an average annual return of 13.7% for the portfolio.

Conclusion

It’s historically been extremely difficult for the average investor to access private real estate opportunities in the same manner as organizations like the Yale Endowment. This lack of access may be one of the main reasons for real estate’s classification as an alternative asset. Fundrise has created wider direct access to commercial real estate investment through the creation of our eREITs, which are open both accredited and non-accredited investors and have a low investment minimum of $1000.

However, crowdfunding and new innovations in technology has made investment in real estate assets open to a much broader portion of the population. Just as institutions have been steadily increasing the allocation of real estate in their portfolios, so too will individual investors through real estate crowdfunding platforms like Fundrise. Soon we may find that real estate is no longer an alternative asset, but a core piece of the average investors portfolio.