Beneath the Spreadsheets

Much has been written about the traditional characteristics of real estate such as cash flow, tax efficiency, inflation protection, diversification. Those elements are real, and important. But they’re not exhaustive.

To understand why real estate has been used across time, market regimes, and investor types, we need to go deeper. What makes it structurally valuable? Conceptually durable? Why does it continue to earn a meaningful place in long-term portfolios from sovereign wealth funds to individual investors?

This is a discussion of those less obvious elements - the ones that aren’t always in the spreadsheet - but should inform how you think about the asset class.

Real Estate and Physical Utility

In investing, it’s easy to get caught up in spreadsheets and pro formas, overlooking that beneath it all is a real, physical thing. Warren Buffett and Charlie Munger often said they weren’t stock analysts, but business analysts. They understood that numbers only made sense in the context of the underlying business - its competitive advantages, pricing power, and operational realities.

Real estate is no different.

It’s a productive, physical, and finite asset. Land is inherently scarce. Buildings create functional value based on how well they serve users. And that functionality drives rent and rent drives valuation.

A multifamily asset may seem simple: it’s a place to live. But what determines value is how well it competes with other options - location, finishes, amenities, pricing, reputation.

Industrial real estate is even more nuanced. Small differences in dock doors, ceiling heights, access, or zoning can dramatically change who the end user is - and how much they’re willing to pay.

The point is: utility drives value. Without having significant experience in the real estate market, it's not always obvious how to properly assess the value associated with the property's functionality. A good sponsor bridges this gap. As a passive investor, it's not critical to know all the nuances of the property, but it is critical that you understand that while math doesn't lie...proforma's are based on assumptions. And those assumptions should be driven by the real estate's utility value.

Real Estate as a Store of Value

It's worth mentioning that real estate can also carry a monetary premium. Essentially, the value in excess of the utility value. This excess value can be due to speculation of future utility value, but it can also be due to its ability to store wealth over time.

Consider international capital flowing into prime US real estate. These buyers often accept lower yields because part of what they're buying is long-term stability or wealth preservation. A place to park wealth across time. This is not the case in all real estate, but it is a dimension that exists.

Time Horizons and Illiquidity Premiums

Private real estate is not liquid. It's not a stock that can be sold at 3pm on a given Tuesday. When investing in private real estate, you are giving up liquidity. When you forgo liquidity, you should be compensated. This is well-understood by institutions: they carve out a portion of their portfolio for long-duration capital, and they expect to be paid for their patience.

If you have a 10-year horizon, and you know you don’t need the capital before then, giving up daily liquidity doesn't need to be viewed as a penalty. It can be a strategic decision. It allows you to access a segment of the market where pricing is less efficient and returns can be higher. Liquidity carries a cost, and you can incorporate that into your portfolio beneficially.

Friction and Alpha

Generally speaking, more friction (inefficient markets) provides more opportunity. Real estate is very inefficient relative to public markets. Of course, within real estate there is a wide spectrum of how inefficient. But because this is the nature of the industry, there is a reward for sponsors and investors that can understand how to monetize the opportunity embedded within the friction. Discipline and intelligent effort are rewarded in private real estate.

Alignment and Intentionality

As an investor, we want to align our allocations with our intentions. Real estate is not for the market trader. Even shorter-term real estate investments (3-5 years) are longer than the average hold period of a stock investment, which is less than one year. Because of this, real estate is best for the investor that has a defined time horizon, wants to own assets with utility that generate real cash flows, and values structure over speculation.

You don't need to think in decades to invest in real estate but be intentional with your alignment and how it works together with your portfolio goals.

Final Thoughts

Real estate’s value isn’t just in the yield or the tax treatment or the diversification.

Those are outcomes. The cause is deeper: its physical utility, its durability, its structure, its friction, and its alignment with long-term capital.

That’s why institutions keep allocating to it. That’s why families hold it across generations. And that’s why it deserves a closer look at how an investor can intelligently use real estate for their portfolio.