Is Private Real Estate the Missing Piece in Your Portfolio?

Since the early 1980s, many individual and institutional investors have seen the 60/40 portfolio of public equities and bonds as the gold standard for achieving long-term wealth. Grounded in the principles of Modern Portfolio Theory, the simple blended portfolio is designed to balance growth (via equities) and stability (via bonds), aiming to provide long-term returns while mitigating risk through diversification.

In the more recent investment environment, however, the 60/40 portfolio may fall short of expectations. For example, returns for both stocks and bonds were meaningfully negative in 2022.[1] Many investors are feeling unsure about the prospects of the 60/40 portfolio as we move into 2025, given that higher inflation in the US typically corresponds with positive stock-bond correlations.[2] Furthermore, public markets—characterized by fewer listed companies and more indexing—are seen as structurally more crowded, concentrated, and correlated.

As a result, a growing number of investors are broadening their thinking around portfolio construction and asset allocation. Here we explore how alternative assets—particularly private real estate—can help investors reach their long-term goals.

Reshaping Asset Allocation Frameworks: Could 40/30/30 be the Right Blend for 2025 and Beyond?

In light of the changing landscape, investors may benefit from redesigning their strategic asset allocation frameworks to add or increase exposure to alternative assets outside of publicly traded stocks and bonds. Alternatives can play a crucial role in providing portfolio alpha, income, inflation protection, and diversification—dependent on an investor’s particular risk tolerance and time horizon, of course.

Adding alternatives to a traditional portfolio can curb volatility and enhance potential risk-adjusted returns. When the experts at J.P. Morgan ran the numbers, they saw that adding a basket of alternative assets to a baseline 60/40 portfolio helped manage risk and improve return. Moving from a portfolio of 60% equities and 40% fixed income to a portfolio with 40% equities, 30% fixed income, and 30% alternatives—evenly split between hedge funds, real estate, and private equity—boosted annualized returns from 8.7% to 9.1% and reduced volatility from 9.7% to 7.9% during the period studied.[3]

From a forward-looking perspective, we see the stock-bond frontier is expected to edge lower in 2025, while many alternative assets are predicted to offer attractive return potential, including US core real estate assets.

Stock-Bond Frontier and 60/40 Portfolios

Based on J.P. Morgan long-term capital market assumptions for risk and return.

Source: J.P. Morgan Asset Management, data as of September 30, 2024, as published in 2025 Long-Term Capital Markets Assumptions.

Identifying an Opportune Entry Point: Is Private Real Estate the Missing Piece in Your Portfolio?

Different alternative asset classes can benefit portfolios in different ways. In looking specifically at the historical performance of private real estate, we see US core assets have been negatively correlated to a traditional 60/40 portfolio while also providing solid returns and income generation—an important characteristic, given the real yield of the 60/40 portfolio has been negative since 2020.[4]

Source: Burgiss, Cliffwater, Gilberto-Levy, HFRI, MSCI, NCREIF, FactSet, J.P. Morgan Asset Management, as published in 2025 Long-Term Capital Market Assumptions. Correlations are based on quarterly returns over the past 10 years from 3Q14-2Q24. 10-year annualized returns are calculated from 1Q14-4Q23. Data are based on availability as of November 30, 2024.

Private US real estate offers a compelling opportunity for long-term investors as current valuations present an appealing entry point. Despite a small rebound in 2025, national commercial real estate prices are down a remarkable 18% from their 2022 peak.

Source: Green Street, as of January 7, 2025. Green Street’s Commercial Property Price Index® is a time series of unleveraged US commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted.

In this market dynamic, assets bought in the era of peak pricing are now distressed. Foreclosures, workouts, and other special situations are an inevitability, with certain asset types and geographies facing more distress than others. Foreclosures are happening daily in the office sector, and we expect to start seeing them on a regular basis in multifamily and other asset classes.

Simply put, distress represents opportunity. More specifically, distress creates opportunities to buy existing assets at a deep discount to replacement value. After a decade of relentless price appreciation, the distressed cycle will offer favorable entry points to those with strategies designed to provide rescue capital for projects in trouble. Sponsors and investors will have opportunities to buy assets below cost or replacement value, setting the stage for compelling risk-adjusted returns.

This presents an opportunity for real estate investors—but timing is everything. By the time investors broadly recognize a given opportunity, it’s usually about to dry up. Analogously, when it feels “early” following a major change, that moment in time often becomes the moment we look back on and realize it was the moment of greatest opportunity.

Most institutional real estate capital, for example, was on the sidelines during the height of the last distressed market in 2009-2011. When big players finally started buying real estate around 2012, it was almost too late.

As such, the current moment arguably presents an advantageous entry point for establishing real estate equity exposure by buying long-term assets. This may be especially true for investors with appreciable gains in other asset classes. Now may be a favorable moment to harvest capital gains and start to make bets in real estate funds that can access the 2025 distressed market.

Selecting the Right Sponsor

For investors ready who are ready to act, selecting the right private real estate sponsor is paramount. To increase the odds of success, look for GPs who are:

• Nimble and close to the ground; able to see and act aggressively on the best opportunities. Sponsors who are still sitting around and waiting—instead of negotiating on deals and getting them in escrow—may not be plugged into the opportunity set.
• Experienced in distressed markets and the applicable strategies, e.g., adaptive reuse and stalled development projects. Many recent entrants into the private real estate space use effective marketing to attract capital, but do they have the track record to thrive in a distressed market?
• Disciplined risk managers who are committed to building long-term wealth for their investors.

As investors rethink the 60/40 portfolio and embrace the potential power of alternatives to achieve long-term investment goals, private real estate stands out as a particularly compelling opportunity in 2025. If private real estate is the missing piece in your portfolio, contact our team to learn more.

[1] Global Financial Data, as cited by Morgan Stanley, represented by 60% S&P 500 Total Return Index and 40% 10-year US Treasury total returns

[2] State Street Global Advisors, “The Global Trend of Positive Stock/Bond Correlation” by Maria Nikitanova and Dane Smith, December 2024

[4] J.P. Morgan Asset Management, Guide to Alternatives® 4Q 2024, calculated by subtracting core CPI YoY change from 60/40 nominal yield. 60/40 portfolio nominal yield calculated by taking the sum of the S&P 500 dividend yield and the YTW of the Bloomberg US Aggregate multiplied by their respective portfolio weights. Based on month-end data. Source: Bloomberg, FactSet, Standard & Poor’s, J.P. Morgan Asset Management.

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About Caliber (CaliberCos Inc.) (NASDAQ: CWD)

With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.

Investor Considerations

The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.

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