POPULARITY OF ALTERNATIVE REAL ESTATE ACCELERATES
Alternatives are specialty operational real estate with lower inventory, less turnover and higher yield. Over the past five years, alternatives investment averaged about $90 billion a year globally, more than double the peak in the previous cycle. Recent CBRE investor surveys found that 60% of respondents are actively pursuing one or more alternative sectors, led by data centers and health-care facilities.
Investor attraction to alternatives is generally from higher yields, stable income and diversification. Some alternative sectors, such as health care6 and student housing, historically offer downturn protection.
Long-term demographic, technological and social changes present generational opportunities for specialty players to grow the market as well as their market shares. Growth of the elderly population is driving demand for seniors housing and nursing care. The growing middle class in emerging markets and their demand for higher education is supporting the student-housing market. And the recent explosive growth of online grocery and pharmaceuticals has fueled the cold-storage industry, while the ever-growing digital economy and widespread adoption of cloud-based services supports the growth of data centers.
FIGURE 20: INVESTOR PURSUIT OF ALTERNATIVES INVESTMENT, 2016-2020
Source: CBRE Investor Intentions Survey, 2020.
MATURING OPPORTUNITIES BY REGION
The required operational expertise has historically confined alternatives investment to owner-occupiers. But institutional and private investors are increasingly attracted to the sector by its greater long-term capital appreciation rate. New capital sources are highly desired because some operational assets, such as data centers, need a high initial investment and capital efficiency. As a result, more core-plus and value-add investors are expected to partner with operators.
Alternatives account for approximately 12% of all commercial real estate investment in the Americas, with the U.S. being the most established and active market. Despite an anticipated drop in total investment due to COVID-19, investors remain interested in leading sectors like seniors-housing, medical-office, life-science, data-center and cold-storage facilities.
FIGURE 21: CAPITAL FLOWS TO AMERICAS ALTERNATIVES, 2004-YTD 2020
Source: CBRE Research, Real Capital Analytics, June 2020.
Investment in alternative real estate has been steadily increasing in EMEA. Alternatives’ share of total EMEA real estate investment exceeded 16% in 2019. Health care, student housing and seniors housing are attracting the most capital. Student housing may struggle in the short term due to COVID-19, but the U.K. will remain a magnet for international students and higher yields in northern European markets will offer strong appeal for investors.
FIGURE 22: CAPITAL FLOWS TO EMEA ALTERNATIVES, 2005-YTD 2020
Source: CBRE Research, Real Capital Analytics, June 2020.
Capital flows to alternatives are relatively small in Asia Pacific due to fewer available assets. The health-care and data-center sectors are growing rapidly in Japan and China. CBRE’s most recent Investor Intentions Survey found growing demand for alternative assets in Asia Pacific.7 New development and expansions by international operators likely will accelerate. However, some markets may require tax reforms and loosening of capital restrictions to boost investment fundamentals.
FIGURE 23: CAPITAL FLOWS TO APAC ALTERNATIVES, 2005-YTD 2020
Source: CBRE Research, Real Capital Analytics, June 2020.
FIGURE 24: U.S. ALTERNATIVE ASSET YIELDS COMPARED WITH GENERAL INDUSTRIAL
Note: These yields are for U.S. assets, but can be used as a global benchmark.
Source: CBRE Research, Q2 2020.
DATA CENTER, HEALTH CARE AND COLD STORAGE OPPORTUNITIES AND RISKS
The following table highlights data center, health care and cold storage facilities as alternative investments, and details the opportunities and risks for each.
| Overview | DATA CENTER | HEALTH CARE | COLD STORAGE |
| Already accommodating advancements in Big Data, Industry 4.0 and the Internet of Things (IoT), data centers will benefit from increased adoption of flexible and remote working. | COVID-19’s impact on health-care systems is only beginning to unfold. Health-care facilities are in high demand and their service offerings are evolving at an unprecedented rate. | One of the most sought-after asset classes for opportunistic investors and increasingly institutional capital, this niche subsector of the industrial market is poised for growth from e-commerce expansion. | |
| Opportunities | Tier I markets with strong infrastructure and power supply like Northern Virginia, Silicon Valley, London, Frankfurt, Singapore and Tokyo offer the best market fundamentals. The next in line are those with strong population and tech job growth such as Atlanta, Toronto, Beijing, Shanghai, Dublin, Madrid and São Paulo. Industry consolidation and international expansion will drive investment. Average yields are 5.0% to 6.0% for Class A assets, and less for core hyperscale facilities. | Health-care employment tends to grow at a faster pace in economic downturns, translating into more space absorption and greater rental income for owners. Of the two main health-care property types, life sciences has a typical Class-A yield of between 4.5% and 5.5%, while medical office yield is more stabilized at around 6%. | Growth in online food sales, particularly for perishables and refrigerated/frozen foods, has piqued investor interest in cold-storage facilities, leading to yield compression. Opportunities include sale/ leasebacks, joint ventures with cold-chain operators and build-to-suit development near major population centers. Conversions from dry to cold warehousing may also present opportunities for experienced investors and developers. Despite elevated CAPEX and OPEX, cold storage commands higher rent premiums than do dry warehouses. |
| Risks | As data-center supply grew over the years, average rent flattened or edged down in primary markets. As enterprises continue to adopt “cloud first” strategies, they outsource greater portions of their overall IT demand to third-party cloud providers, shrinking existing footprints. Sustainability is another major consideration, ranging from the availability and cost of green, renewable energy to data sovereignty and environmental regulations. | Due to the specialized nature of these facilities, build-to-suit development is required with high investment and maintenance costs. On the occupier side, startups, clinics and other small businesses need affordable real estate solutions and access to talent pools—an increasing challenge in tightening markets. Changing regulatory requirements or industry reform may bring additional pressure to investors, asset managers and space users. | From the occupier perspective, foodservice companies may need to reduce their cold storage footprints given reduced capacity by restaurants in the COVID-19 era. Also, investors may find it difficult to capitalize on opportunities without specialized knowledge of the sector. Since these facilities require highly technical features, capital expenditures are significant. Also, operating expenses are typically high as refrigerated warehouses have one of the highest electric consumption rates in the commercial building sector. |
FIGURE 25: COUNTERCYCLICAL HEALTH-CARE EMPLOYMENT – THE U.S. EXAMPLE
Source: U.S. Bureau of Labor Statistics, CBRE Research, June 2020.
6 Mainly medical office and life science properties.
7 Read more at Asia Pacific Investor Intentions Survey 2020.
