Some real estate investors want to choose the path less taken, shunning the most popular property sectors in favor of niches where the primary players are private and family firms. In the annual Emerging Trends in Real Estate Investment survey of U.S. real estate executives conducted PwC and Urban Land Institute, respondents pegged the niche products that will see an uptick in activity in 2017:
1. MIXED-USE Most respondents to the survey said they favor apartments and/or office in a vertical development. While most recognize that such a development creates synergies between the included uses, most evaluate these investments by the strength of each of their components. Their infill urban location fits well with many investors’ strategies.
2. INFRASTRUCTURE. One industry consultant noted that “infrastructure vehicles should be attractive to capital sources interested in long-term reliable returns.” However, one investor indicated that “infrastructure yields are too low” for his fund. One adviser opined that “it will be a while before infrastructure gets to the same place as real estate” in institutional portfolios. Some of the investments most discussed include energy distribution, water systems, ports and airports, tollways, bridges and tunnels, urban transit, and high-speed intercity rail.
3. MEDICAL OFFICE BUILDINGS particularly those associated with a major successful hospital, have been growing in popularity. One portfolio adviser stated that “the Affordable Care Act has given the sector a boost.” It has encouraged the formation of major health care practices, helping improve tenant credit and facilitating professional management. Most investors are even comfortable with ground leases when those leases are with the associated hospital. An investment manager said, “It is another demographic play. We are doing a lot [more] medical office in the last year than we have in the last ten years.”
3. DATA STORAGE has been a lucrative sector for a few institutional investors. Demand for data servers that support an increasingly cloud-based system of data storage has been very strong. For facilities in prime locations relative to data cables, cash flow has been excellent. Data center REITs provide a point of entry for investors. A developer said, “I wish we had invested in those years ago, because no question right now they are incredibly important assets and are only going to grow as more people want to shop online and depend upon general logistics and efficiencies.” An institutional adviser, who has developed data centers in a joint venture with a REIT, said, “They have done really well, and they are expanding this program. Most are reuses of existing buildings in great locations. In the future, they will do more ground up.”
4. SELF STORAGE is gaining ground as consumers seek to declutter their homes. In the survey, a pension fund adviser notes, “The boomers are aging and have already bought too much stuff, keeping the private storage industry busy.” Households moving or downsizing also drive demand for self-storage. In major markets, rental rates and occupancy are quite healthy. The self-storage REIT sector has been on a roll. An investment manager said, “Over 6 percent of our portfolio is in this sector.” Some investors feel that this sector has peaked in its pricing and expect restrained returns in the future, however. A head of real estate investments for a life insurance company notes, “Cap rates keep dropping and there is not a lot more room for values to climb.”
5. STUDENT HOUSING has attracted some REITs investment recently. The typical product has been highly amenitized, targeting affluent parents concerned for the safety and comfort of their college-age children. Some investors believe this sector has largely played out, with sufficient supply to meet the demand from a small high-income market. However, most believe the volume of students at respected colleges and universities will remain strong for the foreseeable future. Another investment adviser said, “We are buyers of student housing. This is somewhat recession resistant, especially for properties not at the top of the pricing market.”
6. SENIORS HOUSING is also gathering steam as people live longer, and are more affluent in their senior years. A real estate economist noted that “the baby boom generation that led to the apartment boom in the 70s . . . is going to lead to a senior housing boom.” A fund manager indicated that “he does really like senior housing, especially independent living and assisted living, perhaps with a memory care wing.” He calls them “hotels without the volatility.” Demand for senior living facilities tends to be strongest in metro markets with large and affluent populations. A particular challenge for operators is labor. An investment manager/adviser said that his “biggest worry with this sector is wage pressure.”
7. RESIDENTIAL CONDOMINIUMS are in demand in the top gateway markets, where inventory of unsold units has seen historic lows and price escalation has been rapid. Unlike in past recoveries, however, supply response has been slow. Banks and their regulators are reluctant to approve the risk of a large project and institutional investors view condo development as increasing capital at risk. In the survey, one condominium marketing executive referred to those early investors who plunged into a market with limited capital availability as “bungee jumpers.” Costs are a particular issue for high-rise product, even in those metro areas with proven luxury markets.
8. MANUFACTURED HOUSING has long been dominated by families and other private investors who provide land with infrastructure to accommodate manufactured homes. In strong urban locations, such properties can generate strong rental return, with relatively low operating costs. Management is often notoriously bad, so professionals can add considerable value. This sector has only recently been recognized by institutional investors, and then only by a few. In many cases, these properties are in good locations, where the underlying land is quite valuable. These can be tricky for investors given that communities often view these properties as valuable sources of affordable housing. Some impose special rent controls or provide other protections. A life insurance company executive noted that “more capital is coming into it.”
SOURCE: Emerging Trends in Real Estate 2017