Non-Traditional Property Types: Part of a Diversified Real Estate Portfolio?

Contributors

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

January 2017

Institutional investors are increasingly allocating capital to property sectors that fall outside the traditional focus of multifamily, office, retail, industrial, and hotel. These non-traditional sectors include self-storage, healthcare, medical office, student housing, manufactured housing, and other niche sectors.1 The literature and research on these non-traditional sectors is limited because of their recent emergence and a general paucity of data collection relative to the major sectors. The systematized capture of performance data for these non-traditional sectors is beginning to improve, and this article attempts to provide a brief review of the data and literature that do exist, give an overview of the non-traditional sectors that have become popular with private market investors, and take a small step forward in examining the data that are available.

INVESTOR DEMAND FOR ALTERNATIVE ASSET CLASSES

Increased demand for alternative investments, real estate in particular, has caused the sector to see increased capital flows from domestic and foreign investors. For example, total pension assets held by the top seven countries globally (the P7)2 total $32.9 trillion as of 2015.3 From 1995 to 2015, the allocation of these pension funds to real estate and other alternative asset classes increased from 5% to 24% (Willis Towers Watson [2015, 2016]). For U.S. pension plans, the allocation to alternatives was even higher at 27% in 2015. In fact, since 2005, over 40% of the growth in U.S. pension fund assets has come from real estate and other alternatives (Willis Towers Watson [2016]). Part of the reason for the shift is derived from the fact that alternatives have offered higher yields in a low-interest-rate environment. Regulatory burdens on large financial institutions have also caused many talented financial professionals to focus on the private markets and alternatives in particular.

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