Hangar in the Portfolio: Aviation Real Estate for Institutional Investors

Abstract

1. Introduction

The insurance industry’s investment challenge is structural and enduring. Insurers collect premiums today to pay claims tomorrow, sometimes decades hence, and must invest the intervening float to generate returns sufficient to cover policy obligations while maintaining regulatory capital adequacy. For generations, this challenge was addressed primarily through allocations to investment-grade fixed income, which offered predictable cash flows, duration matching to liabilities, and favorable risk-based capital (RBC) treatment. The post-2008 low-interest-rate environment fundamentally disrupted this equilibrium. With yields on high-grade corporate bonds compressed to levels that threatened the economic viability of long-duration liability products, insurers began a systematic reallocation toward alternative assets, a migration that accelerated through the 2020s and shows no signs of reversing even as rates have normalized.

The scale of this reallocation is substantial. Insurance company allocations to alternative assets classified under Schedule BA have grown from approximately 3.8% of total invested assets in 2008 to a median of roughly 10% by 2025, with some firms allocating upwards of 20-30%. Private credit now dominates these allocations, but real estate equity, infrastructure, and other real asset categories have also attracted significant capital. Industry analysts project that insurers will continue expanding alternative allocations as they seek diversification benefits, inflation hedging, and enhanced yield in a world where public credit spreads remain at historically tight levels.

Yet the insurance industry’s engagement with real estate as an alternative allocation has been conventional. Insurers overwhelmingly concentrate their real estate equity in the four traditional “food groups”: office, retail, industrial, and multifamily. These property types benefit from deep transaction markets, established benchmarks such as the NCREIF Property Index, and decades of academic research supporting their role in portfolio construction. The concentration, however, creates a paradox: by allocating to the same property types held by pension funds, endowments, and sovereign wealth funds, insurers achieve less diversification benefit than the “alternative” label implies. The COVID-19 pandemic’s impact on office and retail valuations, property types that constitute significant portions of many institutional real estate portfolios, highlighted the risks of this conventional approach.

This paper proposes that aircraft hangars deserve consideration as an addition to insurance company real estate allocations, and is explicit about the evidentiary limits of that proposition. No reliable estimate of the market’s aggregate value exists. The market-sizing reports in circulation are syndicated products sold under multiple brand names without disclosed methodology, and none is relied on here. What can be stated from primary sources is the scale of the underlying infrastructure: the 2025-2029 National Plan of Integrated Airport Systems identifies 3,247 existing airports in the national system, and the business aircraft fleet those airports serve took delivery of 854 business jets and 3,230 airplanes in total during 2025, on billings of $31.0 billion (General Aviation Manufacturers Association 2026).

Two absences shape everything that follows. The academic portfolio construction literature contains no analysis of hangars as a distinct real estate allocation, and the insurance investment literature does not mention the category. More consequentially, there is no return series. NCREIF’s property type taxonomy enumerates residential, hotel, industrial, office and retail within its index and land, self-storage, seniors housing, data centres, operating land, entertainment and parking outside it, and contains no hangar, aviation or aircraft storage category; the nearest adjacent subtype is air cargo, which is freight logistics classified as industrial. A paper of this kind would ordinarily proceed by estimating a covariance matrix. That is not available here, and Section 7 sets out what follows from its absence.

This omission is consequential for three reasons. First, hangars exhibit demand drivers (corporate profitability, high-net-worth household formation, and business aviation fleet growth) that are structurally distinct from those governing the four traditional property types. This differentiation provides portfolio diversification benefits that mean-variance optimization suggests should be valued by any investor holding conventional real estate. Second, hangar leases typically include CPI-linked rent escalation provisions, and the structural undersupply of hangar capacity in most markets provides pricing power that supports above-inflation rent growth, characteristics that directly address the inflation-hedging mandate increasingly central to insurance company investment policy statements. Third, the operational simplicity of hangars relative to office buildings, retail centers, or multifamily complexes reduces the management burden and tenant-coordination risk that have historically deterred some insurers from direct real estate equity investment.

The paper proceeds as follows. Section 2 reviews the academic literature on insurance company portfolio construction, alternative asset allocation, and the emerging scholarship on aviation real estate. Section 3 develops the theoretical case for hangar diversification using the mean-variance framework, with particular attention to the correlation structure between hangar returns and those of traditional property types and fixed-income assets. Section 4 examines the risk-return characteristics of hangar investments that are specifically relevant to insurance company constraints, including income stability, inflation sensitivity, and the non-linear relationship between ground lease terms and capitalization rates. Section 5 addresses the regulatory environment, including NAIC risk-based capital requirements for real estate equity and the Schedule A and Schedule BA reporting classifications that govern how hangar investments appear on insurance company balance sheets. Section 6 presents a practical implementation framework for insurance investment officers. Section 7 discusses limitations and directions for future research.

2. Literature Review

2.1 Insurance Company Portfolio Construction

The academic literature on insurance company investment management is substantial but heavily oriented toward fixed-income portfolio construction and asset-liability management. Briys and de Varenne (1997) developed the foundational option-theoretic framework for life insurer solvency, demonstrating that the insurer’s equity can be modeled as a call option on the surplus of assets over liabilities, a framework that highlights the importance of asset diversification in widening the gap between asset values and liability obligations. Cummins, Phillips, and Smith (2001) extended this analysis to property-casualty insurers, showing that investment strategy is endogenous to the insurer’s underwriting risk profile and that optimal asset allocation depends on the correlation between investment returns and underwriting outcomes.

More recent work has focused on the implications of the low-yield environment for insurer investment strategy. Koijen and Yogo (2022) document a systematic “reaching for yield” behavior among life insurers, showing that firms with more binding regulatory constraints allocate more heavily to higher-yielding, lower-rated bonds, a finding that extends naturally to the question of whether similar yield-seeking behavior explains the migration toward alternative assets. Ellul, Jotikasthira, and Lundblad (2011) demonstrate that regulatory capital requirements create fire-sale dynamics in insurer fixed-income portfolios during market stress, providing a diversification rationale for assets whose valuations are less sensitive to credit spread movements.

The literature on insurer real estate allocation is thin. Andonov, Eichholtz, and Kok (2015) examine pension fund investments in private real estate and find that returns are materially affected by the choice of investment route, with intermediated and fund structures underperforming direct holdings after fees. Their analysis concerns pension funds rather than insurers, but the finding transfers: an institution seeking diversification through real estate equity should weigh direct or semi-direct ownership against fund exposure on more than fee grounds, and Section 5 shows that for a life insurer the regulatory capital treatment points the same way.

Two further literatures bear on the argument here and are usually omitted from advocacy pieces of this kind. Becker, Opp, and Saidi (2022) study what happened when a capital requirement on a specific asset class was removed for United States insurers, and find that allocation to the class rose without any corresponding improvement in its risk. That result is a direct challenge to the analytical device used in Section 5, and Section 5.4 answers it rather than omitting it. Andonov, Kräussl, and Rauh (2021) find that institutional infrastructure investment has underperformed, with the shortfall concentrated among investors with weaker governance who entered the asset class on its narrative rather than on its numbers. A paper recommending a narrative-rich niche allocation has to sit with that finding.

2.2 Alternative Asset Allocation and Diversification

The theoretical case for alternative assets in institutional portfolios rests on the mean-variance framework of Markowitz (1952) and its extensions. An asset with positive expected returns and low correlation to existing portfolio holdings expands the efficient frontier, allowing the investor to achieve higher risk-adjusted returns. The practical question is whether the correlation benefits of specific alternative asset classes persist through market stress, the periods when diversification is most valuable.

Ang, Papanikolaou, and Westerfield (2014) demonstrate that portfolio allocation to real assets provides meaningful diversification during inflationary episodes, the scenario that insurance companies with long-duration liabilities most fear. Hoesli and Oikarinen (2012) show that the correlation between real estate and equities varies substantially across property types, suggesting that property-type selection within the real estate allocation matters as much as the total allocation to real estate itself. Pagliari, Scherer, and Monopoli (2005) extend this analysis to alternative real estate categories including infrastructure, finding that niche property types can provide diversification benefits unavailable from the traditional four property types.

The insurance-specific application of this diversification literature is developed by the industry literature rather than the academic literature. J.P. Morgan Asset Management’s 2025 analysis of alternatives in insurer portfolios argues that private credit, infrastructure, and real estate provide exposure to different risk factors and return drivers that can enhance portfolio resilience across the market cycle. Invesco’s 2025 Insurance Investment Outlook similarly identifies commercial real estate equity as a diversifying opportunity for insurers, noting that reduced capital charges implemented in 2021 have enhanced the asset class’s capital efficiency. GCM Grosvenor’s 2025 toolkit for insurance investors observes that many insurers remain significantly underexposed to alternatives, missing valuable diversification and return potential. None of these industry analyses, however, considers aviation real estate as a distinct sub-category with differentiated risk characteristics.

2.3 Aviation Real Estate as an Asset Class

The academic literature on aircraft hangar valuation is sparse. Lindsey (2008a, 2008b) provides the only comprehensive peer-reviewed treatment, establishing the framework for hangar valuation methodology across the three traditional approaches (cost, sales comparison, and income capitalization) while identifying the unique characteristics that distinguish hangars from standard commercial real estate. Beyond that treatment the literature is silent on hangars as an investment, as distinct from as an appraisal subject. The nearest relevant empirical work is not about aviation at all: the long-run discount rate literature estimates the price effect of remaining lease term in residential leasehold markets in the United Kingdom, Singapore and the Netherlands, and finds substantial, term-dependent discounts to otherwise identical freeholds (Giglio, Maggiori, and Stroebel 2015; Bracke, Pinchbeck, and Wyatt 2018; Gautier and van Vuuren 2019). The Amsterdam municipal ground lease system studied by Gautier and van Vuuren is the closest institutional analogue in any literature to the airport ground lease: a public ground lessor, periodic rent resets, and privately financed improvements on public land.

The institutional transformation of the hangar market provides the context for this paper’s portfolio construction argument. Sky Harbour Group Corporation, which began trading on the New York Stock Exchange in 2022, is the sector’s test case. At 30 June 2026 it operated 60 hangars across 1,042,340 rentable square feet, financed with $166.3 million of tax-exempt private activity bonds issued in 2021 at coupons of 4.00 to 4.25 percent, a further $150 million of subordinate bonds priced at par with a 6.00 percent coupon in January 2026, and a $200 million term loan facility swapped to approximately 4.73 percent. It is not a real estate investment trust, and it remains loss-making at the corporate level. Private equity firms including Blackstone, KKR, and Bain Capital have collectively deployed billions into aviation infrastructure platforms. These institutional commitments validate the asset class’s investability at scale, a prerequisite for insurance company participation.

The adjacent literature on niche real estate asset classes provides both precedent and methodology for this paper’s analysis. Self-storage, once considered a niche, special-purpose asset class with limited academic attention, has evolved into a fully institutional category with dedicated REIT coverage and quarterly cap rate surveys covering 400+ properties. Marinas represent perhaps the closest analogue to airport hangars: waterfront infrastructure assets on public or quasi-public land, often subject to ground leases from government authorities, with single-purpose improvements that cannot be repurposed. The maturation paths of these formerly niche categories provide a template for understanding how hangar investments may evolve in institutional portfolios.

3. The Portfolio-Theoretic Case for Hangar Diversification

3.1 Mean-Variance Analysis: Expanding the Efficient Frontier

The fundamental question for any insurance investment officer considering a new asset class is whether its inclusion in the portfolio improves the efficient frontier, that is, whether the asset’s risk-return characteristics and correlation profile with existing holdings allow the investor to achieve either higher expected returns at the same level of risk or the same expected returns at lower risk. For hangars to pass this test, they must offer a combination of returns and diversification benefits that is not already available through existing allocations.

Consider a representative insurance company investment portfolio consisting of 70% investment-grade fixed income, 10% high-yield bonds and private credit, 10% public equities, 5% conventional real estate equity, and 5% other alternatives. The portfolio’s aggregate return is dominated by the fixed-income allocation, while its volatility is disproportionately influenced by the equity and real estate components. Adding a hangar allocation, funded by a reallocation from conventional real estate or from the alternatives bucket, improves the portfolio to the extent that hangar returns are less than perfectly correlated with the returns of the assets being displaced.

We argue that hangar returns exhibit meaningfully lower correlation with both traditional real estate and fixed income than the conventional property types they would partially replace. The theoretical basis for this claim rests on three structural differences in demand drivers, which we develop in the following subsections.

3.2 Differentiated Demand Drivers

The demand for hangar space is driven by factors that are structurally distinct from those governing the four traditional commercial real estate property types. Office demand depends on employment growth, remote work adoption, and corporate space utilization patterns. Retail demand depends on consumer spending, e-commerce penetration, and foot traffic trends. Industrial demand depends on logistics volumes, inventory management practices, and supply chain configuration. Multifamily demand depends on household formation, housing affordability, and demographic migration.

Hangar demand, by contrast, correlates with corporate profitability, high-net-worth household formation, and executive time valuation, a fundamentally different set of economic variables. Business aviation demand is a derived demand: companies and individuals use private aviation because the value of executive time exceeds the cost of commercial alternatives. This demand is procyclical but responds to different aspects of the economic cycle than retail foot traffic or office lease absorption. The correlation with high-net-worth household formation rather than broad employment growth provides a natural hedge against the labor market conditions that drive office and multifamily demand.

Empirical evidence supports the distinctiveness of these demand drivers. The General Aviation Manufacturers Association (GAMA) reports that the U.S. business aviation fleet footprint grew 61% from 2010 to 2023, and manufacturer backlog exceeds $52 billion, suggesting sustained demand growth over the medium term. This growth trajectory persisted through the COVID-19 pandemic, during which business aviation actually accelerated as corporate travelers sought alternatives to commercial aviation, a period when office and retail real estate suffered severe demand destruction. The pandemic experience provides a natural experiment demonstrating the low correlation between hangar demand and traditional property type demand during the market conditions when diversification is most valuable.

3.3 The Low-Correlation Proposition

To formalize the diversification argument, we structure the correlation analysis across the three primary components of a typical insurance portfolio: fixed income, public equities, and conventional real estate.

Correlation with Fixed Income. Real asset categories generally exhibit low-to-moderate positive correlation with investment-grade bonds, driven by the common influence of interest rates on both bond prices and property capitalization rates. However, the NNN lease structure predominant in institutional hangar investments (where tenants bear most operating expenses, leaving the landlord with a stable net income stream) creates a bond-like cash flow profile with CPI-linked escalation. This hybrid characteristic means that hangar returns share some directional sensitivity with fixed income during normal markets but diverge during inflationary episodes, when CPI escalation provides real return protection that nominal fixed income cannot match. For an insurer whose core allocation is investment-grade bonds, this partial decoupling during inflation is precisely the diversification benefit that improves portfolio resilience.

Correlation with Public Equities. The correlation between hangar returns and public equity returns is mediated by the general economic cycle, as both respond to corporate profitability. However, the relationship is attenuated by the real asset characteristics of hangars, physical capital with replacement cost floors, and by the structural supply constraints that support hangar pricing even during economic downturns. AOPA survey data indicates that 72% of aircraft owners on hangar waitlists wait six months to more than two years, and only 8% of available hangars are rated in excellent condition. This structural undersupply provides a pricing floor that public equities, subject to sentiment-driven volatility, do not enjoy.

Correlation with Conventional Real Estate. This is the critical comparison, because hangars would most likely be funded from or evaluated against the existing real estate allocation. The differentiated demand driver analysis developed above implies lower correlation with each of the four traditional property types than those types exhibit with each other. Office and retail share common sensitivity to consumer and business spending patterns. Industrial and multifamily share sensitivity to population growth and economic geography. Hangars, by responding to business aviation demand, a luxury consumption good with distinct elasticities, offer a differentiated return stream within the real estate allocation.

4. Risk-Return Characteristics Relevant to Insurance Portfolios

4.1 Return Profile

The return figures that circulate for this asset class are underwriting targets, not measured outcomes, and the distinction is load-bearing. Operators and brokers quote internal rates of return in the range of 12 to 18 percent and a risk premium of 200 to 400 basis points above core real estate. Neither figure can be verified, because there is no population of hangar returns to verify them against, and the two are not consistent with each other. Core real estate, measured by the NFI-ODCE index, returned 4.63 percent gross annualised over the ten years to 30 June 2026, and 4.45 percent over the trailing year; the NCREIF Property Index returned 5.00 percent over the trailing year on an appraisal capitalisation rate of 4.63 percent. A premium of 200 to 400 basis points over that base implies something in the region of 6.6 to 8.6 percent. A 12 to 18 percent internal rate of return is 700 to 1,300 basis points over it. Both claims are made routinely, often in the same document, and they describe different assets.

The one observable institutional portfolio does not resolve the question either. Sky Harbour Group is the only public pure-play, and it has not published a target yield on cost; on its fourth-quarter 2025 call management declined to give one, noting that yield on cost at the outset "is not going to be what we would hope for our campus" because of construction cost inflation, and deferred vintage-level disclosure until its first obligated group completes (Sky Harbour Group Corporation 2026). The company remains pre-stabilisation and loss-making. Its equity return reflects a development-stage growth story rather than stabilised hangar property performance, and it cannot be used as a return proxy.

What can be said is that the strategies available in the asset class are conventional: core income (stabilized T-hangar and executive box hangar portfolios with diversified tenancy), corporate net lease (single-tenant corporate hangars on NNN leases with credit tenants), value-add (acquiring underperforming assets, improving operations and occupancy, then exiting at compressed cap rates), and development (ground-up construction in supply-constrained markets where pre-leasing provides development feasibility).

For insurance companies, the core income and corporate net lease strategies are the relevant ones, because they provide the predictable, income-oriented returns that insurer investment policy constraints require. On occupancy the evidence is better than on returns. Sky Harbour reported weighted average occupancy of 83.7 percent across 60 hangars and 1,042,340 rentable square feet at 30 June 2026, with economic occupancy of 85.8 percent, and individual stabilised campuses running from 73.1 percent to 100 percent (Sky Harbour Group Corporation 2026). That is a developing portfolio rather than a stabilised one, and an insurer underwriting to a 5 to 10 percent vacancy assumption at a premier field should treat that assumption as an assumption. The operational simplicity of hangars (no retail tenant coordination, no common area maintenance disputes, no residential regulatory complexity) reduces the variable expenses and management overhead that erode net returns in more complex property types.

4.2 Inflation Hedging Properties

The inflation-hedging characteristics of hangar investments deserve particular emphasis in the insurance context. Life insurers writing long-duration liabilities face the risk that inflation erodes the real value of their investment returns relative to policy obligations. Property-casualty insurers face the risk that claims costs inflate faster than investment returns on premium float. Both insurer types benefit from assets that provide real, rather than nominal, return stability.

The inflation argument usually made for this asset class has two parts, and the evidence supports the second far better than the first.

The first is contractual: rent escalation tied to a consumer price index, or fixed annual increases. The support for this is weaker than it appears. The only audited disclosure available says that "base lease rents vary by location, but substantially all leases feature annual rent escalation," and the filing’s lease maturity table expressly excludes escalations that are not fixed. The widely quoted claim that all leases carry a CPI escalator with a four percent floor comes from investor presentation material rather than from the filing (Sky Harbour Group Corporation 2026). It may well be accurate; it is not an audited disclosure and it describes one operator, not a sector.

The more serious difficulty is duration. The same filing reports a weighted average remaining lease term of 2.6 years measured by contractual payments and 2.8 years by rentable square footage, against original terms running from six months to fifteen years. At a tenor under three years the escalation clause is not what protects the investor. Renewal mark-to-market is, and the evidence there is genuinely favourable, with re-leasing uplift reported at 19 percent over the twelve months to August 2026. But that is a different mechanism with a different risk profile, and the distinction matters for an insurer: a three-year lease repriced to market is a short-duration asset with reinvestment risk, not a long-dated inflation-linked cash flow matched to a long-dated liability. A paper recommending hangars to life insurers on liability-matching grounds has to confront that, and the honest position is that the asset offers inflation responsiveness through frequent repricing rather than inflation linkage through contract.

The second part of the argument is structural undersupply, and here the evidence holds. A statewide inventory in Florida found T-hangars 99.32 percent occupied and box hangars 99.64 percent occupied, with a projected shortfall of at least 1,509 T-hangar units and 276 box hangar units by 2043 (Florida Department of Transportation 2024). A joint assessment of all 116 Pennsylvania public-use airports concluded the state would need 38 percent more hangars to meet current demand. Federal funding does not bridge the gap, and the reason is specific: a hangar is a revenue-producing facility, fundable under the Airport Improvement Program only from nonprimary entitlement funds under 49 U.S.C. 47114(d)(3)(A), only after the sponsor documents that airside, safety and layout plan conditions are satisfied, and not at all where discretionary needs exist within three years. Passenger facility charges cannot fund general aviation hangars. The imbalance is therefore structural rather than cyclical.

4.3 Income Stability and Tenant Credit Quality

The tenant base for institutional-quality hangars is distinctively affluent and creditworthy. Corporate flight departments represent Fortune 500 and large middle-market companies with investment-grade or near-investment-grade credit profiles. Individual aircraft owners who base aircraft at premium facilities typically represent the top deciles of household net worth. FBO operators at major airports are increasingly backed by institutional capital (Blackstone, KKR, and Bain Capital among them) providing corporate credit quality behind lease obligations.

This tenant credit profile compares favorably to the tenant risk embedded in conventional real estate allocations. Office portfolios include tenants ranging from startup companies to established corporations, with meaningful small-business failure risk. Retail portfolios have experienced sustained tenant credit deterioration as e-commerce competition pressures brick-and-mortar profitability. Multifamily portfolios face individual tenant default risk that, while diversified across many units, introduces collection challenges and turnover costs. The concentrated affluence of the hangar tenant base reduces the credit risk component of total return volatility.

4.4 The Ground Lease Risk Factor

The primary risk factor distinguishing hangar investments from freehold real estate is the predominance of ground lease structures. Most institutional-quality hangars sit on airport authority land under ground leases with initial terms of 20-50 years. These leases carry three features that amplify risk relative to standard commercial ground leases.

First, most airport ground leases specify that all improvements revert to the airport authority at lease expiration without compensation to the tenant. This reversion-without-compensation clause creates a wasting asset: the building’s residual value to the tenant declines to zero regardless of the structure’s physical condition. Second, hangars are purpose-built for aircraft storage and cannot easily be converted to alternative uses, eliminating the adaptive reuse safety net that moderates reversion risk in conventional commercial real estate. Third, the sponsor is the sole ground lessor at any given airport, a monopoly position on the letting side that suppresses the tenant’s bargaining power at renewal. The federal guidance governing these leases does not discourage the sponsor from using it: the Airport Compliance Manual directs the reviewing office to ask whether a lease provides "added facility rent once the title of facilities vests in the airport sponsor," and whether renewal options have been granted "with no increased compensation to the airport sponsor" (Federal Aviation Administration 2026).

The relationship between remaining lease term and capitalization rate is understood to be non-linear, with long-dated leaseholds trading close to fee simple equivalents and short-dated ones at steep discounts. The specific discount percentages quoted in practitioner material are not derived from a transaction study of hangar leaseholds, because none exists, and they are not asserted here. What is documented is the financing curve, which is observable: leasehold hangars with long remaining terms access institutional debt on terms comparable to fee simple properties, and lenders generally require debt to be retired some years before lease expiration, so availability contracts sharply as the term shortens. The adjacent evidence is in the long-run discount rate literature, where leasehold properties in the United Kingdom and Singapore are shown to trade at substantial discounts to otherwise identical freeholds as a function of remaining term (Giglio, Maggiori, and Stroebel 2015; Bracke, Pinchbeck, and Wyatt 2018).

For insurance company investors, this non-linear risk profile is manageable through disciplined investment criteria. An investment policy that restricts hangar acquisitions to properties with 25 or more years of remaining ground lease term, with formal renewal options or demonstrable renewal precedent, effectively confines the portfolio to the portion of the lease-term spectrum where reversion risk is modest and financing conditions are favorable. Whatever risk premium is embedded in hangar capitalization rates reflects, in part, the leasehold discount that a fee simple investor does not bear, which is a reason to be careful about treating that premium as compensation for taking a specialised property type. Some of it is compensation for taking a finite-lived one.

5. Regulatory Considerations: NAIC Risk-Based Capital and Statutory Accounting

5.1 The framework, and the distinctions that change the answer

Insurance company investment decisions are constrained by the risk-based capital framework of the National Association of Insurance Commissioners, which imposes capital requirements proportional to the riskiness of the insurer's assets and operations. Assets with higher charges consume more regulatory capital, reducing the capacity to write new business. The framework therefore functions as a shadow price on investment risk, and any proposal of a new asset class for insurance portfolios has to address it.

Three distinctions govern the arithmetic, and material published on this subject routinely collapses them. First, the factors differ between life and property-casualty insurers, and they differ in opposite directions depending on the asset. Second, the published factors are stated pre-tax and the formula applies a separate tax adjustment, so a pre-tax factor compared against an after-tax return overstates the charge. Third, the treatment of a fund interest differs from the treatment of a direct holding, and for a life insurer the gap is much smaller than the general advice suggests. All three are resolved below on life insurer figures, which is the relevant basis for the long-duration liabilities that motivate this allocation in the first place.

Directly owned real estate is reported on Schedule A and carries a base pre-tax factor of 11.00 percent, applied uniformly to company-occupied, investment and foreclosed property. The tax adjustment applies a 21.00 percent factor, so the post-tax charge is 8.69 percent. Three mechanics attach to it and are frequently omitted: the factor applies to book value plus encumbrances rather than to net equity, an encumbrance credit of 1.75 percent is allowed, and the result is floored at 1.30 percent of book value and capped at 45 percent.

The 11 percent factor is recent. It replaced a 15 percent charge on company-occupied and investment property and a 23 percent charge on foreclosed property, effective at year-end 2021 under proposal 2021-06-L. The revision followed an industry analysis of real estate performance from 1978 to 2020 that produced an indicated factor of 9.5 percent at a worst-cumulative-loss standard around the ninety-fifth percentile, to which a 1.5 percent margin was added. The framework does not differentiate by property type. A hangar receives the same treatment as an office building.

5.2 Schedule A against Schedule BA, on the correct basis

The classification of a hangar investment determines the applicable charge. Direct ownership, and majority interests in hangar-owning entities, report on Schedule A. Interests in real estate limited partnerships, private real estate funds and co-investment vehicles report on Schedule BA as other long-term invested assets.

The commonly quoted 20 percent charge for a real estate fund held on Schedule BA is a property-casualty figure, and applying it to a life insurer is an error that materially overstates the penalty for fund exposure. For a life insurer, Schedule BA assets are charged according to their character, and assets with the characteristics of real estate carry 13.00 percent pre-tax, or 10.27 percent post-tax. The instructions state the reasoning: analysis has shown these assets to perform very similarly to directly held real estate, so a modestly higher factor is applied. The two percentage point premium is for reduced transparency, not for leverage. A Schedule BA asset that cannot be characterised at all falls to 30 percent, which is where an insurer that fails to look through ends up, and that is the real risk in fund structures rather than a flat 20 percent penalty.

For a property-casualty insurer the position reverses on both sides. Directly held real estate carries a flat 10.00 percent with no worksheet mechanics, no fair value adjustment and no floor or cap, which is lighter than the life charge. Schedule BA carries a flat 20.00 percent with no look-through, which is heavier. A single-column comparison cannot represent this, and the structuring advice that follows from it differs by insurer type.

The practical implication for a life insurer is therefore narrower than usually stated. Direct ownership is more capital-efficient than fund exposure, but by 158 basis points of charge rather than by 900, and the decision between the two should turn on control, fees and operating capability at least as much as on regulatory capital. For a property-casualty insurer the capital argument for direct ownership is genuinely strong.

5.3 What the charges require a position to earn

Rather than assert expected returns the asset class cannot supply, the comparison below is stated as a break-even. Regulatory efficiency can be expressed as excess return per unit of capital consumed. Two positions are equally efficient when the ratio of excess return to capital charge is equal, so an asset carrying a charge c must earn excess return in proportion to c to match a benchmark. Exhibit 1 states the charges and the resulting multiple, taking the heaviest investment-grade bond band as the reference point. Every figure in the first two columns is a published factor; the third and fourth columns are arithmetic on them. No return assumption enters the table.

Exhibit 1. Life insurer risk-based capital charges by asset class and holding form, and the excess return required to match investment-grade credit on capital efficiency

Source: NAIC Risk-Based Capital Forecasting and Instructions, Life and Fraternal, 2024 edition, pages LR002, LR005, LR007, LR008 and LR030. Tax factors are 16.80 percent for NAIC 1 through 5 bonds and 21.00 percent elsewhere. Multiples and required-return ratios are the author's arithmetic on the published factors. Public common stock is beta-adjusted with a floor of 22.5 percent and a cap of 45 percent; an insurer that does not compute beta must use 45 percent. A common stock concentration charge equal to half the beta-adjusted requirement applies to the five largest holdings.

The table is a constraint, not an argument for the asset. A direct real estate position has to earn roughly five times the excess return of a low investment-grade bond to be equally efficient in regulatory capital terms, and a hangar position carries exactly the same charge as an office building because the framework does not look at property type. The capital efficiency case for hangars therefore rests entirely on whether they earn more than other real estate at the same charge, which returns the argument to Section 4.1, where the honest answer is that nobody knows.

Two recent developments bear on the fund route. The Capital Adequacy Task Force adopted a 0.68 percent look-through factor for Schedule BA funds investing in residential mortgage loans in good standing, extending it from affiliated to unaffiliated funds, which is a precedent for exactly the kind of look-through relief a hangar fund would want. And a proposal to apply a twenty percent haircut to collateral loans backed by Schedule BA joint venture interests would move that charge from 30 to 24 percent. Neither reaches real estate directly, and no proposal is currently open on the Schedule A real estate factor.

5.4 The objection this analysis invites

A capital efficiency argument of the kind set out above is, in form, an argument that an asset is attractive because of how it is treated by a rule rather than because of what it earns. That is worth stating plainly, because there is an empirical literature on what happens when insurers act on such arguments, and it is not encouraging.

Becker, Opp, and Saidi (2022) study the removal of a capital requirement on a specific asset class for United States insurers and find that allocation to the class rose substantially without any corresponding improvement in the class's risk. The behaviour the paper documents is precisely the behaviour a regulatory Sharpe ratio encourages: optimise against the measured charge rather than against the underlying exposure. Koijen and Yogo (2015, 2022) and Becker and Ivashina (2015) document the related reaching-for-yield pattern, in which regulatory constraints push insurers toward assets that look efficient on the regulator's metric.

The regulators are looking at this. The NAIC's own governance gap analysis names, as material weaknesses in the current framework, the differing treatment of Schedule BA across insurer types, state-level variation in Schedule BA limits, insufficient recognition of illiquidity risk, and capital arbitrage achieved through the financial engineering of lower-grade assets. A comprehensive review of the investment risk framework is open. An allocation justified primarily by a favourable charge is therefore exposed to two risks that a return-justified allocation is not: that the charge changes, and that the exposure was mispriced by the rule in the first place.

The defensible version of the argument in this section is narrower than the one usually made. It is not that hangars are attractive because the capital charge is favourable. The charge is not favourable; it is 8.69 percent post-tax, the same as any other real estate, and it requires roughly five times a bond's excess return to break even. It is that a hangar position held directly is treated no worse than conventional real estate despite being a different exposure, so an insurer that believes the exposure is genuinely different is not penalised for acting on that belief. Whether the exposure is genuinely different is an empirical question the data cannot currently answer.

6. Practical Implementation Framework

6.1 Investment Policy Guidelines

Insurance companies seeking to incorporate hangar investments into their portfolios should begin by establishing explicit investment policy guidelines that address the unique characteristics of the asset class. We recommend the following minimum criteria for institutional-quality hangar investments, calibrated to the risk tolerance and regulatory constraints of a typical mid-size to large insurance company:

Exhibit 2. Recommended investment policy guidelines for an insurance company hangar allocation

Source: Author’s recommendations. These are policy guidelines drawn from institutional investment practice and the regulatory constraints in Section 5, not thresholds derived from observed performance.

6.2 Access Strategies

Insurance companies can access hangar investments through four primary channels, each with distinct advantages for different insurer sizes and capabilities.

Direct Acquisition. Large insurers with existing real estate teams can acquire hangar properties directly, benefiting from Schedule A capital treatment, full control over asset management, and the ability to hold assets to maturity. This approach requires aviation-specific expertise that can be developed internally or accessed through specialized advisory relationships. The direct approach is most appropriate for insurers with total invested assets exceeding $10 billion and existing direct real estate programs.

Joint Venture with Aviation Operators. The insurer provides capital, and an experienced aviation operator provides management expertise, tenant relationships, and market knowledge. This structure preserves Schedule A eligibility while reducing the management burden on the insurer. Joint ventures with FBO operators or hangar development platforms offer the additional benefit of the operator’s local market relationships and aviation industry expertise.

Separately Managed Account. An insurer retains a specialized aviation real estate manager to build a dedicated hangar portfolio within a separately managed account structure. This approach provides professional management and Schedule A eligibility while allowing the insurer to define investment criteria and maintain governance control. This is the recommended approach for mid-size insurers with $2-10 billion in total invested assets.

Commingled Fund Participation. Smaller insurers can access hangar exposure through participation in aviation real estate funds. While this approach sacrifices the Schedule A capital advantage (most fund interests are classified on Schedule BA), it provides diversification across multiple properties and airports with a smaller capital commitment. Private equity fund structures targeting aviation infrastructure (including the platforms established by Sky Harbour, Bain Capital, and others) provide institutional-quality exposure with professional management.

6.3 Due Diligence Considerations

Hangar investments require specialized due diligence that extends beyond standard commercial real estate underwriting. Insurance company investment teams should evaluate, at minimum, the following aviation-specific factors: ground lease terms including renewal provisions, reversion clauses, and airport authority disposition toward long-term tenancy; FAA compliance history and the airport’s grant assurance obligations, which constrain the types of exclusive arrangements authorities can offer; the competitive dynamics of the local aviation market, including nearby airport alternatives, based aircraft trends, and FBO competitive positioning; the physical condition of specialized hangar systems including door mechanisms, fire suppression equipment, and electrical infrastructure; environmental compliance, particularly regarding fuel storage and handling operations; and the airport’s long-term master plan, which may signal future development opportunities or, conversely, potential use changes that could affect hangar operations.

7. Limitations, Future Research, and Conclusion

7.1 Limitations

Five limits bear on this paper, and the first is binding on everything else.

There is no return series, and therefore no correlation estimate. This paper's argument for diversification is an argument about demand drivers, not about measured covariance. NCREIF's property type taxonomy contains no hangar, aviation or aircraft storage category, no index or transaction database of hangar returns exists, and no peer-reviewed study has estimated one. The correlation between hangar returns and any other asset class has never been computed, and at present it is not merely unmeasured but unmeasurable. A claim that hangars diversify a real estate portfolio is therefore a hypothesis about the drivers of demand, and it should be labelled as one. Section 3's mean-variance discussion is a framework applied to assumed inputs, not an estimated frontier.

The return figures are underwriting targets, not outcomes. Section 4.1 sets out why, and why the two figures usually quoted together are not consistent with each other. The only observable institutional portfolio is pre-stabilisation and loss-making, has published no yield on cost, and cannot serve as a return proxy.

The inflation-hedging argument is weaker on the contract side than usually stated. The escalator evidence comes from investor presentation material for one operator rather than from audited disclosure, and the weighted average remaining lease term at that operator is under three years. At that tenor the asset offers inflation responsiveness through frequent repricing rather than inflation linkage through contract, which is a different and shorter-duration exposure than a liability-matching mandate contemplates.

The capital analysis is exact but narrow, and the framework is under review. The factors in Exhibit 1 are published and current, but they are life insurer factors, they are subject to revision, and the NAIC has an open comprehensive review of the investment risk framework that names Schedule BA treatment and illiquidity recognition among its identified gaps. Section 5.4 sets out the further objection, that an allocation justified by a capital charge is exposed to the charge changing and to the charge having been wrong.

The demand evidence is thinner than the supply evidence. The Florida inventory is a statewide census and is good evidence. The national waiting-list figures come from a self-selected survey of aviation volunteers conducted in 2021 with no published methodology, response rate or sample size, and the statistic frequently quoted from it is misreported. What that survey found was that at airports carrying a waiting list, 72 percent of aircraft owners waited from six months to more than two years. That is a share of a distribution, not an average; its upper bound is open-ended rather than capped at two years; and it is conditional on the airports that have a list rather than on airports generally. It should not be restated as a typical wait.

7.2 Directions for Future Research

The research agenda follows directly from the limitations, and the first item is a precondition for the rest.

First, construct a return series. Institutional transaction data now exists in a form that did not a decade ago, in public filings, in airport authority records of leasehold transfers, and in the disclosures of the platforms that have entered the sector. A series assembled from those sources would make everything else in this paper testable, and until one exists the diversification argument cannot be evaluated.

Second, estimate the relationship between remaining ground lease term and hangar capitalization rates. No published estimate exists for this property type, and the leasehold discount literature provides both a method and a set of results to compare against. That literature attributes the discount to discounting and the redevelopment option rather than to any bargaining mechanism, so a hangar study should be designed to distinguish the two rather than merely to confirm that the relationship is negative.

Third, follow the methodology the niche-sector literature has already established. Newell and Marzuki have documented the emergence of data centres, student accommodation and farmland as institutional sectors by tracking institutional ownership, index inclusion and transaction volume over time rather than by estimating returns (Newell and Marzuki 2023). That approach does not require a return series, and it is the appropriate method for an asset class at this stage of development.

Fourth, test the asset class through a stress episode once a series exists. The behaviour of hangar values through 2008, 2020 and the 2022 to 2023 tightening cycle is the evidence an insurance risk manager will ask for, and it is exactly the evidence that cannot presently be produced.

7.3 Conclusion

Aircraft hangars are an alternative real estate sub-asset class that insurance portfolios have not examined, and this paper has set out both the case for examining them and the reasons the case cannot yet be closed.

What the evidence supports is the supply picture and the regulatory arithmetic. The undersupply is structural rather than cyclical, documented by a statewide inventory showing occupancy above 99 percent in both hangar segments, and it is not relieved by federal funding because a hangar is a revenue-producing facility that federal grant programmes reach only at the margin and passenger facility charges cannot reach at all. The capital treatment is exact and is stated in Exhibit 1: a directly held position carries 8.69 percent post-tax, the same as any other real estate, and a fund position carries 10.27 percent for a life insurer rather than the 20 percent commonly quoted, which is a property-casualty figure. That difference changes the structuring conclusion and is the most immediately useful finding here.

What the evidence does not support is the return and correlation case, and it does not support it because the data does not exist. The figures in circulation are underwriting targets that are mutually inconsistent, the diversification claim rests on the behaviour of demand drivers rather than on any measured covariance, and the inflation-linkage argument is undercut by a weighted average lease term under three years at the one portfolio that can be observed. An insurer evaluating this allocation should treat the asset as an underwriting proposition about a specific set of assets at specific airports, not as an asset class with an established risk-return profile, because it is not yet the latter.

The institutional transformation of the market is real. A public pure-play now operates sixty hangars across more than a million rentable square feet, private capital has entered aviation infrastructure at scale, and the operating infrastructure that institutional participation requires is being built. What has not yet been built is the measurement infrastructure, and until it is, the honest position for an insurance investment officer is that this is an interesting asset about which too little is known to size an allocation with confidence.

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This paper is research and general information for professionals evaluating aviation real estate. It is not appraisal, legal, or tax advice, and it does not create an engagement.

Related reading: are hangars a good investment, an ROI framework for the same asset class.