Real Estate’s Role in DC Plans
Rich Hill
PLANADVISER: What purpose do real estate investments serve in retirement plan portfolios, both defined benefit and defined contribution?
Hill: Real estate may strengthen retirement portfolios through increased diversification, historically dependable income, and inflation mitigation. Because property returns are based on cash flows from contractual leases and often behave differently from those of public stocks and bonds, real estate could enhance overall portfolio efficiency.
For DB plans, including real estate may offer a stable return stream that aligns with liability-aware strategies. In DC plans, it can expand the plan’s sources of return beyond traditional public markets.
In today’s environment, real estate investors need to be less focused on “market beta” and more focused on stable net operating income growth and disciplined underwriting.
PLANADVISER: What are the key themes shaping real estate markets, both now and in the future?
Hill: Today’s real estate market is defined by divergence. Returns now vary widely across property types, regions, and individual managers, making selection more important than the overall cycle. Higher-for-longer interest rates raise the hurdle for price appreciation and shift emphasis toward cash‑flow durability, lease quality, and prudent capital structures.
At the same time, structural forces—rising technology needs (including artificial intelligence-driven power and data demand), demographic shifts, migration patterns, and a more fragmented global economy—are reshaping real estate fundamentals.
The bottom line: The next phase of real estate investing favors strong fundamentals, local market expertise, and active asset management more than broad, undifferentiated exposure.
PLANADVISER: What investment returns are real estate investments producing now, and what is the outlook for returns?
Hill: Private commercial real estate values have fallen 20% to 25% in recent years, pulling 10‑year annualized total returns to roughly 5%, the low end of historical norms. Even so, total returns have been positive for six straight quarters, driven mainly by income, rather than price appreciation.
Consensus forecasts call for valuation gains of approximately 6% in 2026 and approximately 7% in 2027, with unlevered 10‑year returns of 8% to 10%, in line with long‑term averages. We expect returns to remain income‑led, consistent with history, where income has contributed about 80% of total returns.
However, headline numbers mask wide dispersion. The top half of property types and markets are meaningfully outperforming the bottom half. For example, open-ended funds that own U.S. core commercial real estate, known as ODCE funds, returned 3.8% gross in 2025, but the top quartile delivered approximately 6%, while the bottom quartile was negative.1 Assets with strong occupancy, pricing power and manageable capital needs continue to command a premium.
Some investors may also look to move out the risk curve, as early‑cycle environments historically favor higher‑return strategies. Across 2009 through 2022 vintages, opportunistic funds averaged approximately 12% median net IRRs, and value‑add funds approximately 12.5%; however, median IRRs for 2009 through 2011 vintages rose to the high teens, with top‑quartile results even stronger.
Public real estate has historically produced 100 to 200 basis points higher annualized returns than core open‑end funds over the long run. Allocating 10% to 30% to public real estate could enhance portfolios by raising returns, lowering volatility, or improving Sharpe ratios, depending on the mix.
PLANADVISER: What does the performance of commercial real estate, specifically, look like?
Hill: The commercial real estate cycle has moved into recovery by nearly all traditional measures. REIT valuations—often a bellwether for cyclical turning points—have risen broadly since their 2023 trough. Valuations across most major indices have stabilized, and credit markets are functioning again, helping bolster transaction activity. At the same time, distress—a classic lagging indicator—continues to edge higher, reflecting the long tail of the downturn. But the recovery is highly uneven. Returns now vary sharply by sector, region, and strategy. This unevenness isn’t a flaw in the cycle—it is the cycle. Investors are no longer confronting a broad-based downturn; they are navigating widening dispersion. Going forward, performance will be increasingly alpha‑driven, resembling equity markets, in which asset and market selection matter most.
Historically, real estate recoveries last about two years, and expansions 12 to 13 years, supported by both price appreciation and often‑overlooked income.2 Public and private data show that today’s cycle is still early; valuations are improving but remain below prior peaks, and private markets are trailing the public markets in a familiar pattern.
Beneath the surface, fundamentals are diverging, and the recovery will not be a V‑ or U‑shaped rebound. Instead, it is unfolding as a K‑shaped cycle, with some segments accelerating while others continue to lag.
PLANADVISER: What should retirement plan sponsors and advisers consider when selecting real estate investments to include in their plans?
Hill: Start with role clarity: Is the goal diversification, income, inflation sensitivity, or return enhancement? Then align the investment vehicle with the plan’s liquidity needs and governance structure.
Given today’s wide dispersion, manager selection is critical. Underwriting discipline, asset management capability, leverage policy, and track record through cycles matter. Assess portfolio construction—sector and regional mix, tenant and lease quality, development exposure, and refinancing risk.
Evaluate fees and terms—including gates, notice periods, and redemption mechanics—as they directly affect participant experience in DC plans and liquidity management in DB plans.
Finally, stress‑test results across different interest‑rate and growth scenarios to understand potential outcomes.
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1Source: NAREIT ODCE trailing returns as of 12/31/2025.
2 Source: NAREIT, NCREIF, Principal Asset Management as of 4Q25. Based on duration and returns of listed REITs and private real estate across various cycles between December 1974 – December 2025.
Principal Asset Management and PLANADVISER are not affiliated.
Important Information
Past performance is no guarantee of future results and should not be relied upon to make an investment decision. Investing involves risk, including possible loss of principal. Commercial real estate (CRE) investing carries several inherent risks, including those related to the economy, interest rates, market fluctuations, high upfront costs, and tenant-related issues like defaults or high turnover. Economic downturns can lead to decreased property values and increased vacancy rates, while financing costs, insurance expenses, and potential environmental or structural problems can also pose significant challenges. All these factors and risks can impact rental income and overall investment returns.
Asset allocation and diversification do not ensure a profit or protect against a loss.
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