Real estate money managers are looking beyond the four food groups of retail, multifamily, office and industrial to provide investors with returns in a challenging investment environment.
The managers are nibbling on everything from parking lots to memory-care facilities. Investors are not only investing in these areas through specialized funds, but also are finding that slices of diversified real estate funds are being invested in these niche investments.
While institutional real estate allocations have been climbing steadily over the past four years, investors are increasingly nervous, said Doug Weill, managing partner of Hodes Weill & Associates, a New York firm that advises real estate managers.
“We are seven years into the (economic) cycle,'' Mr. Weill said. “There is geopolitical unrest, risk is rising around the world and investors worry about a possible increase in interest rates.”
Institutional investors' real estate allocations are expected to reach 10.3% in 2017, up from 9.9% this year and 9.5% in 2015, according to the annual real estate survey from Cornell University's Baker Program in Real Estate and Hodes Weill.
However, investors are taking a defensive approach, concentrating on debt and niche type investments they believe will weather an economic downturn, Mr. Weill said. “Non-main food group investments are gaining much more favor in the marketplace, albeit from a very small base,” Mr. Weill said.
While niche real estate investing is more developed in the U.S., there is interest among European investors as well, said Will Rowson, managing partner in the London office of Hodes Weill. “Niche real estate strategies are not as mature (in Europe) as in the U.S. and so there are fewer opportunities for investors to get into those,” Mr. Rowson said.
What's more, there is a shift toward investor focus on higher yielding strategies. Value-added strategies are more in favor today, followed by opportunistic investments, Mr. Weill said.
While core funds stick to the four main real estate property types, value-added and opportunistic funds can stray into niches, said David Stone Phelps, a partner in the Los Angeles office of law firm Akin Gump Strauss Hauer & Feld LLP who specializes in real estate transactions, primarily representing real estate managers, capital market clients and institutional investors.
“Opportunistic and value-added funds ... can have a broader focus and investment strategy including assets to be repositioned or `out-of-favor' or specialized real estate. In the end it's all about yield and returns,” Mr. Phelps said.