Alternative Real Estate – Transcending Cycles

Alternative real estate is having its “day in the sun”. Despite the upheavals of the Covid-19 pandemic and the current economic malaise, alternative property fundamentals have never been stronger. Occupancy, rent growth and limited new supply are at or near all-time highs across these sectors. Each year these property types are becoming less Alternative and more Core as investors value the consistent and resilient performance regardless of broader economic conditions. Alternatives rely on predictable demographic trends and life events to create recurring property demand and durable income that is less correlated to the market than traditional real estate.

These needs-based assets have now made quick recoveries from multiple Black Swan events, benefitting from ongoing consumer demand and heightened investor interest. Consistently strong real estate fundamentals coupled with short duration leases remain important differentiators, probably never more so then in the current environment. The alternative sectors provide unique investor opportunities for the following reasons:
 

• Leases are generally monthly or annually, compared to multi-year traditional sector leases. Shorter duration leases allow properties to regularly reprice during inflationary periods. Also, as lease relationships exist with individuals, credit exposure is diversified and demographic analysis helps forecast future demand.
• Through the pandemic alternative assets provided needed essential services so rent was paid, occupancies were high and fundamentals remained intact. This impact of the pandemic has seen demand trends rapidly accelerate across the alternative sectors. The emerging Build-to Rent housing sector grew literally from scratch, self-storage benefitted from work-from-home and widespread moves into rental housing. Life science discovery provided necessary vaccine solutions. While MOB and Senior Housing were the “best care option” as assets were open and delivering needed services during the pandemic and beyond.
• Technology and innovation further differentiate alternative sectors as they can be more receptive to technology advances. Medical Office uses technology to allow critical services to leave the hospital to outpatient settings. Life Sciences uses AI to rapidly accelerate the drug discovery timeline as do Data Centers to increase automation capabilities. Even Self Storage employs sophisticated yield management software to maximize store revenue.
• Opportunity in the alternative asset classes is clear as asset ownership remains fragmented and institutional ownership lags the traditional sectors. Nowhere is this more pronounced than in the comparison between the public and private markets. Alternative assets represent 60% of the total U.S. public REIT market capitalization.¹ Meanwhile, the current composition of alternatives in the NCREIF NPI index, while growing, accounts for only 6%.² Liquidity increases each year as more investors enter the sectors seeking some exposure to alternatives in their portfolios. Liquidity in 2021 exceeded $87 billion compared to $21 billion in 2012.³