Mention the term “commercial real estate investment,” and what likely comes to mind are multifamily, office, industrial, and retail properties. According to Deloitte Financial Services, “Having a diversified portfolio of these core assets provided consistent income from rental growth, sustained value appreciation, and minimal variation in performance.”

But things are changing. According to a just-released Deloitte Financial Services Report, “Next-Generation Leaders May Accelerate Real Estate Investment in Alternative Properties,” economic and demographic changes are generating more interest and investment in alt real estate. This category includes data centers, cell towers, life sciences and single-family rentals. While not new, additional alternatives piquing more interest include self-storage facilities, senior housing, and student housing.

Explaining the Change

Tim Coy, one of the report’s authors, told Connect CRE that one reason for more targeted interest in non-core assets is liquidity. “Following the Global Financial Crisis in 2008, large owners and investors were seeking higher yield, which generally came from sectors that were a bit less mature and outside of core property types,” said Coy, who is Deloitte Center for Financial Services’ Real Estate Research Manager.

Another reason is that the specialized knowledge necessary for owning and operating these assets is more collaborative. “For those less experienced in the telecommunications space, for instance, there may be joint venture acquisition opportunities with partners who know that space better,” Coy explained. “They can be the operators while investors provide the capital.”

Then there are the demographics. Specifically, top decision-makers in the industry who were responsible for building CRE portfolios are retiring. This, in turn, is challenging “the next generation of leaders on ways to prepare to adapt from conventional strategies,” the report said.

By the Numbers

Deloitte Financial Services’ research team offered metrics to back the assertions. For example:

• Alternatives grew at a 10% compound annual growth rate (CAGR) from $67 billion in 200 to more than $600 billion in 2024.

• REITs have led the way in this sector, increasing their allocation to alternatives from 26% in 2000 to over 50% in 2024.

• Alternatives outperformed traditional properties over the past decade, reporting an 11.6% annualized return versus the 6.2% return for more traditional core assets.

• By 2034, alternative property values will increase at a 15% CAGR to account for nearly 70% of industry portfolio values (today, alt properties account for 40% of portfolio value.

Coy added that a previous Deloitte Financial Services prediction said 60% of CRE industry leaders will reach the age of retirement within the next several years, with a new crop of leaders taking the helm. “That turnover coincides with the strategic imperative around asset selection seeking excess returns that could come from alternatives,” Coy said.

Another advantage is diversification. “Broader selections of asset types or geographic exposure could allow for more expansive portfolio choices, based on risk/return profiles,” Coy said.

Cautions and Caveats

All investments carry risks, and alternative properties aren’t different. Coy said that, while alt properties have generated excess returns, historic performance isn’t indicative of future returns.” Coy also stressed that alternative property operations can require specialized knowledge. “A traditional office investor might not have the capacity to understand the regional nuances of the manufactured home industry,” he said.

Alternative investing is also more volatile because the assets aren’t as mature as their core counterparts and are targeted by a smaller pool of owners and investors. As such, “alternatives aren’t a surefire strategy for excess returns,” Coy noted.

Finally, piling alternative real estate assets into a portfolio doesn’t mean that investors should ditch the four core types. Said Coy: “Having a diversified balance of core and alternatives could help mitigate potential volatility risks.”