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Alternative Assets Gaining Ground Among Investors As Old Standards Like Retail And Office Fade

Alternative real estate assets, including niche property types like self-storage, student housing and medical office buildings, have long lived on the margins of commercial real estate investing. But as historically preferred property types like offices lose value, these specialized asset classes are gaining ground as investment targets.

During the third quarter, investment in alternative property types spiked to $18.3B, making up 15% of total investment dollars, according to MSCI. Full-year data isn’t yet available, but capital markets experts say that the share of investment in alternative assets is expected to grow.

“Every time you listen to an institutional investor share their best ideas for sector strategy, all you hear is data centers, student housing, self-storage, life sciences,” Michael Gordon, a partner and global chief investment officer at Harrison Street, told the Urban Land Institute.


2023 was a difficult year for investment, but the atmosphere is likely to change in 2024 if the Federal Reserve follows through on its December commentary indicating that interest rate cuts could be in the cards this year.

“Overall, there's an expectation that assuming the Fed does cut rates by 75 basis points over the course of 2024, which is what they alluded to at their last FOMC meeting, we will see investment activity pick up,” Moody's Analytics Senior Economist Ermengarde Jabir told Bisnow.

That includes alternative classes, which usually include medical office, manufactured housing, life sciences, self-storage, student housing and data centers.

The most recent peak in investment in U.S. alternative real estate classes as a percentage of total investment came during the third quarter of 2022, when their share, $33.3B, came in at 17% of the total, according to MSCI data.

Although that was the highest percentage of total investment, the most recent dollar volume peak came during Q4 2021, ahead of the rapid rise in interest rates and when investors were gung-ho for every sort of real estate. That quarter, investors put about $42.4B in alternative assets, or about 11% of the overall total, MSCI reported.

As soon as the reality of high interest ratres set in, investment shrank in every asset class, including alternatives. The first and second quarters of 2023 were especially sluggish, with $8.6B and $9.5B invested in alternatives, respectively. But with overall investment down, those figures nevertheless represented 9% and 10% of total CRE investment.

ULI's 2024 Emerging Trends report characterizes investor interest in alternatives as a “portfolio pivot” in which fund managers are now mulling a broader range of product types, including those traditionally seen as niche but that now offer more compelling returns. That is especially the case now that office buildings and malls often don't generate the returns on investment they once did, for various social and economic reasons.

The U.S. office investment market plunged 60% to $43B between 2022 and 2023, according to JLL. That total puts 2023 roughly in line with 2010, in the aftermath of the Global Financial Crisis. Transaction volume for retail properties in Q3 2023 was down 40% compared to a year earlier, JLL reported.  


Alternative assets that are tied to emergent economic activity make them especially interesting to investors because they don't know the extent of the upside yet, MSCI Research Executive Director Jim Costello said.

“For data centers, there's a broad secular trend moving to more clicks,” Costello said. “Those clicks need to live someplace. How many data centers do we need? How many clicks are we going to have? We don't know yet. That creates opportunities for some of these investors to chase.”

Student housing, medical offices and self-storage, on the other hand, tend to be driven by population growth or growth of certain age groups, Costello said.

Following demographics to determine where people are moving is easier than trying to predict the market, Costello said.

But demographics aren’t necessarily destiny for alternative asset classes. Life sciences space has a demographic component that investors are chasing, but there are other reasons to be in the sector.

“Life sciences companies have been outperforming the whole stock market, and that means those companies are flush with cash, and they have to be someplace,” Costello said.

Self-storage, a slice of the alternative investment business that has seen its dollar volumes boom, also demonstrates another trend in which major companies make huge deals, including mergers and acquisitions.

“[Investment volume] has increased, but some of that is just driven by one-off deals,” Costello said. “Buying a whole other company distorts the overall trend because it isn't every day you can buy a big self-storage platform.”

Self-storage has been a particularly robust alternative asset class. It is the only class that saw more investment in the first three quarters of 2023, at $14.3B, than all of 2022's $12.4B, according to MSCI data. A chunk of that was the Public Storage acquisition of Simply Self Storage for $2.2B.

As an industry, self-storage grew rapidly leading up to the pandemic and during its first few years, but the sector has returned to more normal growth rates. Still, there is some uncertainty about the future of self-storage, Jabir said.

Self-storage was doing extremely well for a few years, evolving from a sector largely owned by mom-and-pop investors for decades. But in the past 20 years, it has solidified into a sector with a large institutional owner-operator presence, she said.

“Over the past two years since inflation has really picked up, households have had to reflect on where their discretionary spending goes,” Jabir said. “As the cost of necessities takes a larger chunk, for many, self-storage becomes nonessential. Are the items in their storage units worth the price they're paying monthly? Households are being much more mindful of where exactly they're spending their discretionary income.”

Still, as interest rates drop, that might boost self-storage, Stuf CEO Katharine Lau told Bisnow.

“I think housing activity will pick up and more people will be moving,” Lau said. “What's really nice about storage is that it's a pretty resilient product. So even if there is contraction or we enter a recessionary environment, people lose their jobs or homes, storage is actually one of the things that they'll need for their belongings or furniture.”

As demand for self-storage edged downward recently, developers have responded by not building as much, which might have the longer-range impact of making the asset class more attractive, Jabir said.

The self-storage pipeline remained relatively stable nationwide in November at 3.8% of total inventory, Yardi Matrix reported, but the number of development projects halted by their developers nationwide slowly increased toward the end of the year.

“So we haven't necessarily seen a tremendous drop in fundamentals in performance metrics in the self-storage sector,” Jabir said. “The general pullback doesn't cancel all of the gains from the sector's outsized growth for a few years. It's just not necessarily growing anywhere near at the same pace.”