In commercial real estate, the terms institutional and noninstitutional grade real estate (or “Class A” vs. the rest) are used often. While most of us think we know the difference, an all-encompassing definition can be elusive. However, the most recent PwC Real Estate Investor Survey has provided a good foundation to define institutional real estate as well as several key factors that differentiate it from noninstitutional grade.
Institutional Real Estate Definition
PwC defines institutional real estate as, “real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria.” To supplement the definition, the report clarifies that true institutional buyers are mostly found in the United States, but include foreign pension funds, foundations, endowments and foreign life insurance companies.
Key Differences Between Institutional and Noninstitutional Real Estate
The definition that PwC has offered lays the groundwork for several notable differences between institutional and non-institutional real estate:
- Size (price) matters. When you have a few billion dollars of your investors’ money to place, the odd Ruby Tuesday’s is just not worth the time for due diligence. A few hundred of them in a single portfolio? A different story. In the Mid-Atlantic, many of our clients start at $20 million for a single asset.
- Institutional grade real estate generally merits more attention from larger investors whereas non-institutional investments can be made by anyone.
- Institutional grade investments are generally lower risk. Credit tenants and/or reported store sales are typically a minimum criterion.
- Markets often receive significantly fewer institutional investments if the local economy worsens.
- Institutional grade properties are known to have “brochure-like” appearances when compared to other investment opportunities.
- Institutional grade properties face little risk of physical deterioration or obsolescence during a typical holding period following investment.
- Institutional investors generally benefit from lower fees throughout the investment process.
Do Institutional Grades Last Forever?
Institutional grades are not permanent, and will whither as a variety of factors change. Property condition, market conditions, vacancies and even non-economic investor preferences (e.g., LEED certification) determine whether a property is deemed institutional or non-institutional grade.
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