A recent capital markets report de Colliers finds that alternative assets, once on the periphery of commercial real estate investors’ radar screens, have come to the fore as investors seek to increase yields. Connect CRE spoke with Aaron JodkaNational Director of Capital Markets Research, to learn more.
Q: What attracts investors to alternative asset classes?
A: Alternative assets now occupy a prominent place in investment portfolios. Single-family rental (SFR), life sciences, data centers, student housing and self-storage benefit 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 first rounds of their maturation, suggesting the possibility of outsized returns.
Q: What types of investors are turning to these assets?
A: Investment comes from all types of investors. Private equity, retirement, sovereign wealth funds, insurance companies and family offices, among others, have these types of assets on their buy lists. Investments in data centers come from two main sources: real estate investors and infrastructure funds, which adds strong liquidity to this space. Local and regional players are active in the self-storage space, as well as in life sciences. The vast majority of SFR owners are small family owners, although institutional investments are increasing. There is also still near-record equity waiting to be deployed, suggesting that investors will continue to seek alternative assets for yield, growth and diversification.
Q: Is capital concentrated in specific geographic areas?
A: There are investment opportunities in all geographies and in alternative asset classes. For example, the life sciences industry is heavily concentrated in a handful of markets. Boston, Philadelphia and New Jersey lead the east coast, while the San Francisco Bay Area and San Diego lead the west coast. Boston and San Francisco captured nearly six out of 10 venture capital 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, DC and Seattle. Emerging hubs include Denver-Boulder, St. Louis, New Haven, Pittsburgh and Minnesota. This widespread growth is creating investment alternatives across the country.
SFR’s investments have been strongest in the country’s Sun Belt growth corridors, although investors have also found opportunities in the Midwest. With homes located everywhere, investors have many potential targets. Student housing investors rank universities based on Tier 1 school attendance (over 20,000 students) as the safest bets. Consider the Power Five football conference schools.
Q: Is it easy for investors to pivot capital from traditional property types to alternatives?
A: These types of products require additional operational know-how and understanding. Owners with the necessary specialist knowledge raise capital and partner with sources of capital across the country. Traditional multi-family investors have directed their capital towards student housing in search of higher returns and diversification. Publicly listed student housing REITs were gobbled up, with Blackstone Vehicles acquiring American Campus Communities, the last remaining company. Ownership is starting to become more concentrated in the hands of private equity across various types of assets. Self-storage is an intensive management space, where investors can outperform with the right management in place.
Q: What is the outlook for these alternative asset classes?
A: The potential within the SFR space may be greater than any other alternative asset class. In fact, it may be larger than entire sectors of the commercial real estate market. Zillow estimates the US housing stock is valued at $43.4 trillion. Nuveen notes that this is more than double the valuation of the traditional CRE market. Meanwhile, the world of data centers is changing. Businesses need more energy because the throughput of these facilities is constantly increasing. Efficiency also improves, allowing more output per rack than in the past.
ESG considerations are moving to the forefront and will be central to future investment and development in key asset classes, as well as alternatives. How tenants value ESG in their properties and whether they will pay higher rent for those homes is something to watch. Data centers are big power consumers, but new developments are finding ways to be very energy efficient, with some being able to supply electricity to the grid. Investors and occupiers will look to the ‘E’, ‘S’ and ‘G’ differently, depending on the asset.