Edgewater Investment Group

FILTERS
Alternative real estate data center

New sectors expand real estate investment universe

Instead of residences and retail, think self-storage and healthcare.

Many individuals’ only real estate investment is their primary residence, which may make up a significant portion of their overall net worth. However, some want to add exposure to the sector, and these real estate investors can now look beyond traditional residential and retail spaces to add property to their portfolios.

Niche inventory has prompted some to think beyond the block for alternative sources of yield and inflation protection as well as diversification. The investable universe of real assets has expanded to include self-storage, healthcare and life sciences facilities, cellphone towers and data centers, to name a few.

The latter two, of course, play integral roles in all things tech, including cloud services, artificial intelligence and demand for remote working capabilities. And an aging population focused on quality of life and overall health requires robust, local healthcare resources, often located near premier research universities.

“Non-core publicly-traded real estate sectors now comprise more than half of listed real estate market cap,” said Jonathan Hughes, real estate equity research director at Raymond James. “Returns among the 16 real estate sectors are likely to vary significantly going forward, increasing the importance of active management and sector expertise.”

Recent surveys from CBRE, which specializes in commercial real estate services and investments, found that 60% of investor respondents are actively pursuing one or more dynamic sectors, led by data centers and healthcare facilities.

Data centers

As many industries and governments rely more and more on data analytics, storage and processing as well as cloud computing, it stands to reason that data centers could see rising demand as well. So, while the buildings themselves may not be pretty, investors may still find them attractive.

A recent report by Grand View Research expects the global data center construction market to register a compound annual growth rate of 6.4%, reaching a value of $308.7 billion by 2027. Potential investors will want to pay attention to location, particularly proximity to fiber optic lines that tend to offer higher speeds and bandwidth, as well as proximity to reliable electrical power.

Traditional real estate sectors use existing inventory as a gauge of capacity and potential growth, while data centers focus more on available electrical power supply, measured in megawatts (MW) or kilowatts (kW). Be mindful of large-scale new centers/providers that could potentially disrupt the industry, increasing the risk of functional obsolescence among existing centers.

Healthcare and life sciences 

As mentioned before, demand for quality healthcare rises along with an aging population. In a challenging regulatory environment, partnerships between clinical and research facilities are creating nontraditional health systems that meet demand for this growing demographic. We’re also seeing a rise in convenient, accessible “med-tail” clinics in strip malls to provide outpatient and behavioral health services.

Optimizing existing hospital campuses is part of the equation, as is shoring up infrastructure. Headwinds include pressure to reduce costs and pressure to expand operating margins and build equity from physician groups.

Self-storage

Given the hot housing market, it makes sense that investors are looking to adjacent sectors for opportunities beyond apartment buildings and land to develop. Self-storage facilities tend to be resilient in many market environments and enjoy steady occupancy rates as well as low capital expenditures, making it easier for them to maintain cash flow in a down period. Again, location matters, and opportunities may exist in places that appeal to remote workers as Americans continue to declutter and make space for home offices.

There are investment options beyond direct ownership, which requires significant oversight, can limit liquidity and may be more difficult to manage if you can’t achieve a large enough market share. A knowledgeable advisor can help point you toward options that may capitalize on the sector’s competitive advantages without having to be hands-on.

The takeaway

Smaller, specialty sectors may have more room to grow but tend to be more idiosyncratic compared to core real estate offerings. Due diligence is paramount, and it’s important for real estate investors to weigh the risk/reward tradeoffs with their advisor. Together, you can evaluate the strength of potential investments.

Quality is key, as is the flexibility to adapt pricing in line with shifting supply-demand dynamics as well as changing demographics. Varying markets have characteristics that may differ from areas you’re familiar with but could also build in a layer of diversification if added thoughtfully. Prudent long-term investors may want to lay a strong foundation first before progressively adding non-core assets to their real estate portfolio.

Sources: seekingalpha.com; mercer.com; cbre.com; us.jll.com; money.usnews.com; globest.com; sun-sentinel.com; grandviewresearch.com; cre.org; wealthmanagement.com 

Investing involves risk, and investors may incur a profit or a loss regardless of strategies selected. Diversification does not ensure a profit or protect against a loss. Past performance may not be indicative of future results.

TAG CLOUD