A recent capital markets report from Colliers finds that alternative assets, once on the periphery of commercial real estate investors’ radar screens, have moved front and center as investors look to increase returns. Connect CRE spoke with Aaron Jodka, national director of capital markets research, for a closer look.
Q: What is attracting investors to alternative asset classes?
A: Alternative assets are now a prominent focus in investment portfolios. Single-family rental (SFR), life sciences, data centers, student housing and self-storage are benefitting from broader demographic trends, increased capital allocations, and their clearly recognized status as institutional asset classes. As investors seek alpha in their investment portfolios, alternative asset classes are proving to be an attractive haven for capital. Many are in the early innings of their maturation, suggesting the opportunity for outsized returns.
Q: Which types of investors are moving into these assets?
A: Investment is coming from across the investor types. Private equity, pension, sovereign wealth funds, insurance companies and family offices, among others, have these asset types on their buy lists. Data centers investment is coming from two main sources: real estate investors, and infrastructure funds, adding strong liquidity to this space. Local and regional players are active in the self-storage space, as well as life sciences. The vast majority of SFR ownership are small mom-and-pop owners, though institutional investment is increasing. There is also still near-record equity capital waiting to be deployed, suggesting that investors will continue to look at alternative assets for yield, growth, and diversification.
Q: Is capital focused on specific geographies?
A: There are investment opportunities across geographies, and across alternative asset classes. For example, the life sciences industry is heavily concentrated in a handful of markets. Boston, Philadelphia, and New Jersey are tops on the East Coast, while the San Francisco Bay Area and San Diego lead out the West Coast. Boston and San Francisco captured nearly six of every 10 venture capitalist dollars in 2021. The industry is thriving in major metropolitan areas like Chicago and New York, as well as smaller markets like Raleigh, Suburban Maryland/Washington, D.C., and Seattle. Emerging hubs include Denver-Boulder, St. Louis, New Haven, Pittsburgh, and Minnesota. This widespread growth is creating investment alternatives throughout the country.
SFR investment has been heaviest in the country’s growth corridors of the Sun Belt, though investors have found opportunities in the Midwest as well. With housing located everywhere, investors have plenty of potential targets. Student housing investors tier universities based on attendance with Tier 1 schools (20,000 + students) as the safest bets. Think the Power Five football conference schools.
Q: Is it easy for investors to pivot capital from traditional property types to alternatives?
A: These product types require additional operational know-how and understanding. Owners with the necessary specialized knowledge are raising capital and partnering with equity sources throughout the country. Traditional multifamily investors have pivoted capital to student housing in search of higher yields and diversification. Publicly traded student housing REITs have been gobbled up, with Blackstone vehicles acquiring American Campus Communities, the last remaining company. Ownership is starting to become more concentrated in private equity’s hands across various asset types. Self-storage is a management-intensive space, where investors can outperform with the right management in place.
Q: What’s the outlook for these alternative asset classes? (can discuss growth opportunities, size/scale, movement from other asset types)
A: The potential within the SFR space may be more significant than any other alternative asset class. In fact, it may be larger than entire sectors of the commercial property market. Zillow estimates that the U.S. housing stock is valued at $43.4 trillion. Nuveen notes this is more than double the valuation of the traditional CRE market. Meanwhile, the data center world is evolving. Companies need more power, as the throughput of these facilities is ever increasing. Efficiency is also improving, allowing more output per rack than in the past.
ESG considerations are moving to the forefront and will be a focus of future investment and development across the main asset classes, as well as alternatives. How renters value ESG in their properties, and whether they will pay higher rent for such homes is something to watch for. Data centers are major power users, but new development is finding ways to be very energy efficient, with some able to supply power back to the grid. Investors and occupiers will look to the “E”, “S”, and “G” differently, depending on the asset.