In previous blogs, we looked at bonds and stocks as asset classes. We developed an approach based on return factors and return correlations to decide which asset classes should be considered by most investors.

In this post, we look at real estate. However, unlike the case with stocks and bonds, the vast majority of real estate is not publicly traded. Because most real estate is not public traded, it is difficult to observe the kind of return correlations that are observable in public markets. Therefore, we instead must look at characteristics, and attempt to identify asset classes that way.

Largest Asset Class

Real estate, by value, is the largest asset category in the world.

The total value of global real estate is estimated at close to $400 trillion.[1] Of this, the largest part by far is residential real estate, and most of that is not available for investment except very locally.

Commercial real estate is the next largest category, at about $50 trillion, about 25% greater than the total value of the world’s farmland, which is estimated at about $40 trillion.

Investable Real Estate

For US investors, it is possible to invest in a variety of types of real estate, both in the US and internationally.

A small fraction of US real estate (and probably a smaller fraction of global real estate) trades in any publicly traded market. In the US, one recent estimate suggests that all the real estate is valued at about $130 trillion, with about $110 trillion of that being residential.

The National Association of Real Estate Investment Trusts estimates that the total market capitalization of all US REITs is about $1.4 trillion, or just about 1% of the total market cap of all US real estate.[2]

Compare that 1%, for example, to the publicly traded fraction of the value of all US companies. The total market cap of US companies was about $62 trillion at the end of 2024.[3] The total value of all non-publicly owned companies in the US is estimated at around $13 trillion.[4] Thus, publicly traded companies account for about 80% of the value of all companies, while publicly traded real estate accounts for only about 1% of the value of all US real estate.

Real Estate is “Chunky” For Most Investors

In the United States, the most common type of real estate is the single-family home. The US Census bureau suggests that there are about 85 million single family homes, out of a total of about 133 million dwelling units.

The median price of a single-family home is about $419,000.[5] And while the average market value of a single apartment is less, probably around $135,000,[6] apartments are rarely sold individually. The smallest apartment-type buildings are duplexes and triplexes, bringing the smallest investable amount up to generally about $270,000 or so on average.

Any way you look at it, compared to stocks and bonds, the smallest available investment size in directly owned real estate is large.

Considering that minimum investment size, it is perhaps surprising that publicly traded real estate accounts for such a small percentage of the market.

Advantages of Publicly Traded Real Estate

Publicly traded real estate investment vehicles – mostly REITs – are liquid, and almost infinitely divisible. For many investors, the divisibility is more important than the liquidity, because divisibility allows for diversification.

With a REIT, an investor can invest as little as a few hundred dollars and obtain a much more diversified exposure to real estate than would be possible for all but the largest investors owning property directly.

The liquidity aspect of REITs comes along as an added benefit.

Diversification in Real Estate

Individual real estate parcels, whether they are homes, office buildings, apartment buildings, or other specialized types of property carry idiosyncratic risk as well as systematic risk.

Systematic risk is risk that affects the entire market. In the case of real estate, perhaps the general level of interest rates is the systematic factor that most affects all real estate.

Idiosyncratic risk in real estate might be thought of as local risk. Local conditions might, and often do, affect one real estate market while having little or no effect on other markets that are more distant.

Thus, for example, everything else equal, it is riskier to own an apartment building in a single location that to own an equivalent market value of a geographically diversified REIT or partnership that owns the same kind of apartments, but owns them in widely diverse markets.

Home Ownership

Home ownership represents a concentrated risk. A home, by definition, is in a single place. Owning a single home exposes the owner to risks such as the neighborhood goes bad, or local economic conditions reduce demand, or natural disaster strikes, or zoning becomes more onerous, or local government drops the ball (think of the many cities that had their city centers hollowed out of the last 50 years, largely because of bad governance).

In addition, home owners typically consume the largest part of their return.

What do I mean by that? Many studies, both in the US and in other countries, have found that over the long run, the capital return to home ownership is slightly higher than the inflation rate. In other words, the price of the home might keep up with inflation, or do slightly better.

But the majority of the return to owning residential real estate comes from rents. But most people live in the homes they own. This is equivalent (in economic terms) to getting rent and then spending it.

There are good reasons to own a home, and some of them are economic. But purely as an investment, largely because of the costs to own them (including mortgage payments, “consumed rent”, insurance, and property taxes) owner-occupied homes, on average, are poor investments. They are also very undiversified.

In a future post, we will look at the volatility of real estate.

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[1] https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate-property-remains-the-worlds-biggest-store-of-wealth.html

[2] https://www.reit.com/data-research/reit-market-data/us-reit-industry-equity-market-cap

[3] https://siblisresearch.com/data/us-stock-market-value/

[4] https://www.blackrock.com/institutions/en-us/insights/private-markets-outlook

[5] https://fred.stlouisfed.org/series/MSPUS

[6] Estimated from the national median rent of about $1400 per month, and a gross rent multiplier of 8 times.