Six alternative real estate sectors gaining ground with investors
Sweeping technological and societal changes could lead to emerging categories of real estate outperforming the mainstays in coming years
Commercial real estate (CRE) consists of property investments or transactions undertaken by professional investors, with returns accruing from both rent and appreciation. The total value of CRE in the US was valued at around USD27 trillion in the first half of 2024, making it the country’s third largest asset class, behind publicly traded equities and government debt.
CRE’s four dominant traditional categories are office, retail, industrial and multi-family residential (predominantly apartment buildings). These have faced significant headwinds in recent years, though there are signs of a tentative recovery. Meanwhile, a variety of other alternative real estate categories – from data centers and cell towers to senior housing and self-storage facilities – have come under the spotlight, propelled by megatrends such as the artificial intelligence (AI) boom and aging populations.
The emergence of these niche property categories, also referred to as alternative or specialty real estate, could result in seismic shifts in real estate investment over the coming decade.
It’s also worth highlighting that the long-running benchmark index for private real estate funds, the NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE), had until recently only included funds that were predominantly allocated to the traditional four categories of real estate. The NFI-ODC’s inclusion of new property subtypes such as student housing and life sciences facilities since the first quarter of 2024 paves the way for private CRE funds to expand into niches.
Notably, the key benchmark index for publicly listed real estate investment trusts, the FTSE Nareit US Real Estate Index, which has not been subject to the same inclusion criteria as the NFI-ODCE in the past, has a much larger share of exposure to alternatives. As of 2024, alternatives made up about half of the FTSE Nareit US Real Estate Index (see Figure 1), compared to only around 9% of the NFI-ODCE.
There has also been a steady trend for more real estate assets to be managed actively by general partners (GPs), creating opportunities to enhance service delivery and returns. The share of GPs with operational capabilities and expertise reached 37% in 2023, an 11 percentage point increase over the previous decade.
Six niches in focus
Emerging alternative real estate categories offer several advantages for investors. They are supported by secular demand drivers, could prove more resilient during economic downturns given that they largely fall within needs-based segments, and because they are still in the early stages of institutionalization, which may mean that they offer attractive entry points.
Here are six niche categories that investors are paying particularly close attention to:
- Data centers and digital infrastructure: The former was one of the highest performing categories within the NCREIF Property Index (NPI) in 2024, recording an 11.2% return against a flat overall index, and has become a highly sought-after investment among private markets firms. Infrastructure real estate companies, which generally focus on cell towers and fiber optic transmission networks, have also seen occupancy levels soar on the back of robust demand from the march of digitalization.
- Senior and student housing: Senior housing generated a 5.6% return within the NPI in 2024, and given the rapidly aging population in the US and much of the developed world, is poised for strong structural demand growth in the decades to come. Even though demographic growth of college-age students has plateaued, enrolments in four-year colleges is increasing, leading to steady increases in student housing rent.
- Health and wellness facilities: The growing cohort of seniors and their greater healthcare needs, along with the post-pandemic trend of consumers increasingly prioritizing health and wellness, support a range of specialty categories. In addition to ongoing robust growth in healthcare spending in the US, the share of outpatient services has also increased substantially, while inpatient services have declined over the past two decades, giving rise to the need for more external healthcare facilities. The life sciences sector is also anticipating strong growth, lifting the prospects of related properties.
- Single-family rentals: Against the backdrop of rising housing affordability concerns, this category could benefit from strong growth in the 35- to 44-year-old demographic in the US as older millennials with young families seek more space and quality school districts. Institutional ownership of rental homes in the US is growing quickly, potentially resulting in better operating economies.
- Self-storage: Demand soared to new heights following COVID-19, driven by hasty relocations, increased home sales and the need to make space for offices and classrooms at home. But following the end of pandemic restrictions and higher interest rates putting a crimp on the housing market, demand has corrected sharply.
- Manufactured homes: This category generated the highest returns within the NPI in 2024, at 11.7%, supported by demographic tailwinds, a shortage of new housing supply, and the greater affordability of pre-fabricated homes compared to those built on-site. Private equity ownership of manufactured housing communities has been the subject of considerable controversy, but it is also seen as a pragmatic solution to current housing challenges, allowing residents to lease land but own their pre-fabricated homes.
As demand for alternative investment strategies increases, CFA Institute is committed to educating investment professionals on these growing asset classes. Explore our private markets and private equity certificates.
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