Investing in Commercial Real Estate Niches
An earlier version of this article was originally published on July 25, 2019.
Many developers and sponsors find early in their career that it is beneficial to select a real estate niche, or specialty, and stick with it. After all, property owners and developers with the most expertise often specialize in one area of real estate, like student housing. They can then leverage this focus into more efficient operations and, ultimately, better potential returns. The beauty of online real estate investing, however, is that passive investors have the freedom to diversify into multiple strategies and real estate niches. This article takes a focused look at commercial real estate niches that investors increasingly covet to diversify their portfolios, as noted in our recent survey.
Source: EquityMultiple Investor Survey, April 2021
The Rise of Commercial Real Estate Niches
The four “core” commercial real estate asset classes were codified long ago: multifamily, office, retail, and industrial. While these core CRE asset classes remain the focus of industry chatter and research, a growing array of real estate niches have begun commanding attention from investors. Due to some combination of growing tenant demand, demographic trends, scant competition, and emerging technologies, these real estate niches present new opportunities for yield, and in some cases a recession-resistant investment thesis.
An Overview of Commercial Real Estate Niches
EquityMultiple has offered investments into several of the more established niche CRE asset classes. We have also provided educational material to delineate the ins and outs of each:
- Senior Living Facilities – Properties that provide both regular care and residency to a growing cohort of older Americans. Due to the essential nature and growing demand for tenancy, this is considered a potentially recession-resistant niche asset class by many institutional investors. Read more.
- Manufactured Home Communities – Communities of pre-built homes that are either owned by an operator/investor or owned by the tenant, with the land on which the unit sits leased to the tenant. With a growing need for alternative affordable housing solutions, and high barriers to entry constraining supply, the ‘MHC’ asset class is drawing increased interest from national institutional real estate investors. Read more.
- Car Wash Real Estate – Modernized car wash facilities have emerged as a viable institutional real estate asset class, with technological gains improving profitability potential. Data-driven location selection also allows for investors to incorporate attractive downside scenarios into business plans. Read more.
- Student Housing – One of the main benefits of student housing is the tenant base is consistent and highly visible. Tenants often pre-lease prior to the beginning of the school year, making cash flow highly predictable. Read more.
- Co-Living – Co-living is a form of communal living in which residents get a private bedroom in a furnished multi-unit property with shared common areas. The increasing cost of living and lack of affordable housing options in many urban cores has led to rapid growth in demand for co-living units. Read more.
- Fractured Condos – A fractured condo refers to a condominium project in which only a portion of units were sold, while the remaining units operate as rentals. In markets where demand for rental housing exceeds that of for-sale housing, fractured condos have become excellent acquisition targets for value-driven multifamily investors due to remarkably discounted prices. Read more.
- Cannabis Facilities – Cannabis real estate is complex and significant barriers to entry remain, resulting in a demand/supply imbalance. As such, investing in Cannabis Facilities can be attractive from a risk-upside perspective. Read more.
- Medical Office Buildings – The Medical Office Building (MOB) asset class has exhibited consistent growth in recent years, buoyed by increased demand for outpatient services and strong historical performance. Compared to other asset classes, MOBs generally exhibit uniquely steady long-term occupancy rates. Read more.
In addition to the above, commercial real estate niches may also refer to data centers, and self-storage facilities – both of which show strong investor sentiment. In fact, 72% of recent survey respondents said they were interested in data centers, followed by self-storage at 71%.
Post-pandemic, these property types are particularly appealing. Investment in data centers should continue to grow, as more infrastructure is needed to support cloud computing. The adoption of e-commerce, remote work, and connected technology will likely add to this trend. Demand for self-storage may also increase due to low rates of homeownership (and hence greater demand for storage space). Additionally, there is a trend of Baby boomers “right-sizing” their living arrangements to be closer to family and/or amenities. The combination of these factors, along with low operational costs, make for a compelling investment thesis.
A Note on Sponsor Specialization
Sponsors generally specialize in areas where they see opportunity, and where they may have existing relationships. Returning to our student housing example, one such sponsor has focused on this niche for the past ten years and has acquired 19 student housing properties across the East Coast, Midwest, and South. We believe their impressive track record is a benefit for passive investors, as it helps build trust. Prior to committing any funding, investors want to know the sponsor has expertise completing similar projects.*
The Bottom Line
Although property type is certainly important, it is not the only criteria that can impact the return profile of an investment. The asset’s location, offering type, and the sponsor’s track record also come into play. Prior to investing in any niche asset class, consider whether the sponsor’s overarching business plan aligns with your investment goals.
To learn more about EquityMultiple investments in niche assets and beyond, please schedule a call with our Investor Relations team or sign up for a free account to review current and previous investment information.
*Past performance does not guarantee future results
All opinions expressed herein constitute EquityMultiple’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of EquityMultiple, are based on current expectations, estimates, opinions and/or beliefs of EquityMultiple. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
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