A simple definition of institutional-grade real estate is: real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria. True institutional buyers are limited to U.S. and foreign pension funds, foundations, endowments, foreign life insurance companies, and certain foreign government entities that function like pension funds. U.S. life insurance companies are included in their capacity as equity investors for pension funds and other institutional clients.

There is a natural synergy between the real estate and the investment, which can be related to degree of risk. The physical and financial characteristics of institutional-grade property are such that the degree of risk is lower than in noninstitutional-grade property. Superior improvements in a superior location reduce risk related to physical deterioration and functional and external obsolescence. Superior occupancy and tenancy reduce financial risk.

Institutional-grade real estate is "brochure quality." It is located in a major market or submarket that is recognized in the institutional investment community. The property is impressive, has "street appeal." The physical characteristics of institutional-grade real estate include large size; high-quality construction; above-average architectural design, configuration, and layout; modern mechanical systems, sprinklers, heat and smoke detectors, and alarms; good amenities; and in some areas and property types, good adjacent parking. The property is in excellent condition and is less than 10 years old or has an effective age of less than 10 years.

The financial characteristics of institutional-grade property vary and depend on the investor’s specific objective for the specific investment - for example, immediate cash flow, asset enhancement, or upside potential. In general, however, the property has low leasing risk, proven stable occupancy, a preponderance of financially strong tenants, and good long-term growth potential. Institutional-grade real estate is also distinguished by its use.

The institutional-grade label is not static, and institutional status can change with a property’s physical condition or economics, market conditions and trends, or investors’ preferences. Significant vacancy due to a major credit tenant’s move to another building can damage a property’s status unless the space can be readily re-leased to a credit tenant. An entire market or submarket can be shunned by institutional investors with a severe downturn in the regional or local economy such as happened in the "Oil Patch" states in the late 1980s. An aging property that is not technologically upgraded, or one whose design does not meet current market needs, may fall out of the institutional class. Reversal of any such conditions can cause reinstatement of institutional status.

In years past institutional investors generally confined their real estate purchases to CBD office buildings, major retail properties, and urban high-rise apartment buildings. Today suburban office buildings, garden apartment complexes, and industrial warehouses are candidates for institutional dollars. As the potential for sustained value and long-term return from other "brochure-quality" properties increases, investor preferences may expand further.

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