Navigating Frothy Markets: Why Private Real Estate May Offer Better Diversification Today

It’s been some time since public markets have felt so exuberant—or more fragile. Mega-cap equities surged through 2024 and 2025 on an AI-fueled rally. As Société Générale strategist Albert Edwards warned earlier this year, ‘the US equity market is at serious risk,’ with valuations in tech surpassing even dot-com-era extremes.” Bank of America’s Michael Hartnett put it more bluntly: ‘This looks like a bigger bubble,’ citing valuation multiples that exceed the 2000 peak. 

Cryptocurrencies, meanwhile, staged a dramatic resurgence before suffering another steep correction; Bitcoin soared past $100,000 only to plunge more than 30% shortly thereafter. Amid the turmoil, the guy who infamously shorted the Great Financial Crisis likened bitcoin to tulips. Such volatility has left many self-directed investors questioning how much risk they are actually carrying—and how diversified they truly are. No one wants to be caught holding only tulips when the sun fades. 

These concerns are well founded. In environments where sentiment, liquidity, and momentum drive valuations, portfolios overly dependent on public markets can become unexpectedly fragile. Everything is fine, until it isn’t. For self-directed accredited investors, those with options, the question is no longer whether to diversify into alternatives, but how.

One answer lies in private-market real estate—what might be crudely described as the “gateway drug of alternative assets.” Private real estate has historically exhibited lower correlation to public equities, steadier income, and more fundamentals-driven value than either public REITs or speculative assets.

Public REITs Are Not the Diversifier Many Assume

Diversification into real estate, in much of the literature, is synonymous with REITs. The question is whether publicly traded REITs can offer the same insulation as private real estate. Historical data suggests otherwise.

Publicly traded (equity) REITs have historically shown moderate to high correlation with U.S. equities. According to Nareit, the long-term correlation between Equity REITs and the S&P 500 has ranged from 0.6 to 0.8 depending on the measurement window, meaning REITs often move closely with broader equity markets.

This was evident in 2022, when the FTSE Nareit All Equity REITs Index fell 25.1%, while the S&P 500 declined 18.1%. The pattern repeated on the upside in 2023: the same REIT index returned 11.3%, trailing the S&P 500’s 26.3% gain. Major institutions such as U.S. Bank noted that rising interest rates in 2024 continued to pressure REIT valuations, contributing to their underperformance relative to the broader market. 

By contrast, a KKR study reported a 33% correlation between real estate private equity and public equities in the years 2012-2023.

In short: public REITs behave like stocks, not like the underlying real estate they own.

For investors seeking a true diversifier—something uncorrelated to daily market swings—private real estate plays a very different role. For much of the past 10 years, individual accredited investors have relied primarily on real estate crowdfunding platforms for private real estate exposure. As we note in a recent whitepaper, intermediated platforms have often resulted in lower quality sponsors, multiple layers of fees, misalignment of incentives, and not a great deal for individual self-directed investors. Lightstone DIRECT presents investors a new option for diversifying into private-market real estate, with single-asset multifamily and industrial deals, with Lightstone investing 20%+ of the equity in each deal. 

Private Real Estate: Lower Volatility, Better Risk-Adjusted Returns

Private real estate assets are valued periodically based on operating performance, not market sentiment, which contributes to materially lower volatility and near-zero correlation with equities in many long-term studies. For portfolios, this low correlation is critical, especially at moments where public markets are showing leading indicators of frothiness. Low cross-asset correlation can potentially smooth volatility and improve portfolio-level risk-adjusted returns.

Long-term data also shows that private real estate has delivered competitive annual performance (~8–9%) with significantly lower volatility than public REITs. Income tends to be stable, appreciation is driven by fundamentals, and values do not fluctuate with trader sentiment. Note that Lightstone, a $12B AUM real estate owner/operator, has achieved a 27.6% net IRR on investments exited since 2004. Two sectors in particular—multifamily and industrial—continue to stand out.

Multifamily: Income Stability Despite Supply Waves

Despite pockets of oversupply, U.S. multifamily occupancy remains around 95%, effectively unchanged year-over-year as of late 2025. High mortgage rates keep renters in the market longer, while household formation and demographic shifts support long-term demand. Rent growth has moderated in certain Sun Belt metros due to temporary supply spikes, but as construction slows, fundamentals are expected to re-stabilize.

Industrial: Secular Demand and Tight Supply

Industrial real estate—especially “last-mile” facilities under 200,000 square feet—has outperformed larger warehouses thanks to limited supply and persistent tenant demand. Smaller-footprint markets have posted stronger rent and occupancy growth since 2022 and are forecasted to outperform bulk logistics markets for the next five years.

With e-commerce, supply-chain reshoring, and same-day delivery continuing to expand, industrial remains among the most resilient commercial property types. At a time when many individual investors who are exposed to private real estate may only hold multifamily positions, Industrial could be a strong option for further diversification. 

The Allocation Gap: Individuals Remain Dramatically Underexposed

While institutional investors such as pensions, endowments, and sovereign funds routinely allocate 20–30% of their portfolios to private-market alternatives—including private real estate—individual investors allocate far less.

Major institutions—including KKR, BlackRock, and Preqin—have noted that individual investors remain meaningfully under-allocated to private markets compared with institutional investors.

For example, in its Regime Change report, KKR (KKR) highlights that private real assets such as private real estate play a central role in institutional portfolios because of their income, diversification, and low correlation characteristics—but that private-wealth portfolios tend to have much smaller exposures to these strategies, largely due to historical access barriers and product constraints.

BlackRock (BLK) similarly observes in its Private Markets Outlook that individual and wealth investors have, to date, had much lower participation in private markets than institutional allocators, despite growing interest as technology and regulatory changes have enabled greater access.

And Preqin, in its Alternatives in 2025 report, notes that individual investor demographics have become a key future AUM growth driver precisely because their allocations have historically been far below institutional levels.

Moving Beyond the Crowdfunding Era

Access to private real estate is not new, but the last decade’s “Real Estate Crowdfunding 1.0” wave revealed clear limitations. As the longest bull run in U.S. history played out, it was real estate markets that were subject to froth. Individual investors, rightly looking for alternatives to the 60/40 portfolio, became increasingly caught in the cross-hairs.  

Platforms that boomed in a low-rate environment have struggled to withstand tighter capital markets conditions:

• Weak sponsor oversight led to high-profile failures, including the Nightingale/CrowdStreet scandal involving over $60 million of misplaced investor funds.
  
• Overly optimistic underwriting by less experienced sponsors led to realized returns far below projected IRRs in some cases.
  
• Layered fees and intermediaries eroded investor economics.
  
• Post-funding accountability was often minimal.
  

As interest rates normalized, investors discovered that many crowdfunding marketplaces were not built to operate through real market cycles.

The industry is now entering a more mature phase—one defined not by platform intermediaries, but by direct, aligned relationships with institutional managers.

Lightstone DIRECT: A More Mature, More Aligned Path to Private Real Estate

This is the context in which Lightstone DIRECT emerges—not as a novel access point, but as a better-aligned, institutionally grounded alternative to the crowdfunding models of the past decade.

Lightstone DIRECT opens access to single-asset multifamily and industrial investments sourced from Lightstone’s institutional pipeline. Accredited investors invest directly with a vertically integrated owner/operator, not through a marketplace.

Key distinctions include:

• 20%+ GP co-investment — far exceeding the 2–5% industry norm and ensuring deep alignment between manager and investor.
• Direct-to-investor model — eliminating intermediaries, reducing fee stacking, and improving transparency.
• Deal-by-deal selection — giving investors control and clarity, in contrast to opaque blind pools or semi-liquid retail REIT structures tied to public-market sentiment.
  Institutionally resilient asset classes — focusing on multifamily and industrial, two sectors with strong, durable demand fundamentals.
• Monthly distributions for more robust cashflow, and an early funding incentive to allow investors to put their money to work before the close date of the deal. As of 12/5/25, this rate is 5.75%, well in excess of the typical money market yield.
  

Crucially, direct private real estate investing allows investors to decouple part of their portfolio from public-market volatility entirely. A stake in a stabilized apartment community or logistics facility does not swing with daily headlines or AI-driven market sentiment. 

For accredited investors seeking true diversification, this model offers what crowdfunding could not: alignment, rigor, and cycle-tested execution from an experienced, institutional private real estate operator.

Conclusion

Signs of froth across equities and crypto are increasingly difficult to ignore. When markets detach from fundamentals, prudent investors look for ballast—assets whose value derives from real income, real utility, and long-term demand. For several years, since the rapid rise in interest rates, individual investors understandably paid less attention to real estate as a means of reducing cross-asset allocation. The moment has come to revisit real estate, but through improved distribution channels.  

Private-market real estate, when accessed through aligned, institutional-quality partnerships, offers exactly that.

For self-directed accredited investors, platforms like Lightstone DIRECT provide a more mature, more transparent, and more resilient path into an asset class that institutions have relied on for decades to stabilize portfolios and enhance long-term returns.