The Role of Commercial Real Estate in a Diversified Portfolio

Many high-net-worth individuals and families are enhancing portfolio diversification by following the lead of major institutions and incorporating commercial real estate into their investment strategies. Among global high-net-worth investors, the average portfolio allocation to real estate held firm at 19% in 2024 and 2025, up from 15% in 2023, according to the 2025 World Wealth Report.

“A high percentage of our clients and prospective clients own commercial real estate as part of their overall investment strategy,” says Scott Landau, senior vice president and managing director for Fifth Third Private Bank.

The appeal lies in commercial real estate’s unique ability to serve multiple strategic functions within a wealth management framework.

The advantages of a commercial real estate property

Investors typically find commercial real estate (CRE) appealing due to the many attractive features it offers. As a core component of well-diversified real estate investment portfolios, CRE provides a range of benefits. Some of the key advantages that come with buying investment property include:

• Income generation and steady cash flow from rental income
• Wealth preservation from owning tangible assets
• Portfolio diversification with assets that are not directly correlated to the stock market
• Portfolio stability because real estate does not experience the day-to-day swings in valuation that the stock market does
• An inflation hedge due to rising property values and the potential to increase rents to keep pace with inflation
• Tax benefits, including the potential to deduct interest expenses on a loan. You should consult your tax advisor before buying an investment property

Commercial real estate is often considered when an individual or family experiences a liquidity event, such as the sale of a business, and is seeking to reinvest proceeds. “Oftentimes, they are buying properties that they believe will be a good income source to help replace some of the income that they are no longer getting from their business,” says Landau.

Is commercial real estate right for your wealth strategy?

Owning a shopping center, apartment building or medical office can be appealing, but it’s important to make sure that a new commercial real estate investment fits within your overall wealth strategy. “One of the most valuable ways we support these clients is by guiding them through the decision-making process, helping to ensure they’re not overpaying or stretching to buy a property that may not be the right fit for their financial situation or goals,” says Landau.

Real estate is an illiquid asset by nature. In addition to looking at an individual’s or family’s overall wealth strategy, it’s also important to consider how commercial real estate fits into the overall liquidity of a portfolio.

Wealth advisors’ conversations with clients about their overall financial needs often involve asking if they have upcoming events or expenses, such as the purchase of a new house or vacation home, or paying for college tuition. “Every person’s situation is different, and the first and most important thing we do is work to understand what each client’s needs and goals are,” says Landau.

Managing commercial real estate debt and liquidity

One general rule of thumb is to encourage investors to maintain 10%-15% liquidity within a portfolio to backstop any commercial real estate debt. For example, if a client has $20 million in commercial real estate debt, they should have at least $2 million in cash or liquid assets on hand at all times, Landau says.

“I have seen many situations where people take on too much debt on a commercial real estate property, the market turns and suddenly they are having to write another check to pay down the debt,” says Landau. “Many challenges can arise if you don’t get strong advice on the front end.”

Tailored financing solutions for commercial real estate investors

In addition to the conventional commercial real estate financing that we offer, investors often need commercial real estate financing solutions tailored to their specific circumstances and objectives. A financial institution should work with clients to customize solutions to help achieve their goals. In the current high-interest-rate environment, clients may choose to leverage liquid investments to get a loan or tap a line of credit to finance a property purchase, which can help lower their overall costs compared to a traditional real estate loan.

In cases where a property may have some vacancies or tenant turnover, the financial institution can make a loan secured by the commercial real estate, while also using a client’s investable assets as part of the collateral pool.

One of the fundamentals of building relationships in the private wealth management space is a financial institution’s role as a trusted advisor. As part of its loan underwriting, Fifth Third’s Private Bank advisors leverage available resources and market knowledge on different dynamics within the commercial real estate market, such as new construction and rent growth trends, which they share with clients to help them make informed decisions. “We don’t make prescriptive recommendations, but we do offer guidance to help them along the way,” says Landau.

For more information on commercial real estate investing, contact your Fifth Third Private Bank advisor.