At the same time, Park Madison executives are starting to see increased interest in niche sectors for investors that are underallocated to smaller property types such as self-storage and senior housing, Lashine said.
“Investors face a challenge of needing to build a diversified portfolio, but two of the four major property types — office and retail — continue to experience headwinds,” she said.
While office is expected to be the worst-performing sector in 2023 at -15.4%, PREA’s latest forecast survey shows, industrial and multifamily property types are expected to underperform retail this calendar year. The apartments sector is projected to have the second-worst performance at -6.5%, followed by industrial at -5.6% and retail, -1.4% in 2023, the PREA forecast shows.
“Niche property types are an attractive alternative, providing diversification benefits and in some cases the potential for outsized returns,” Lashine said.
In the past, niche property types were too small for large institutional investors, but that may be changing, consultants said.
“There are other property types that heretofore were perhaps too small (for) CalPERS to access and those are becoming more appropriately sized classes for you to explore and probably to step into,” Meketa’s Fields said at the September investment committee meeting.
CalPERS is moving away from office and retail investments and toward such sectors as data centers and affordable housing, Fields said. “Some of the best supply and demand fundamentals” are in affordable housing because the country is deeply in need of more of it, she said.
Indeed, while several niche sectors are inching up, they are still are still only a minuscule part of real estate managers’ AUM, P&I’s survey results show. The largest of the niches, single-family housing for rent and senior housing, represented 1% each of U.S. institutional tax-exempt assets in the current survey. The single-family housing for rent sector is up from 0.5% as of June 30, 2022, while senior housing is flat compared with last year’s survey.
While the space is growing, it’s still difficult to accumulate large portfolios of most niche properties, managers said.
“Data centers are hard to buy but definitely a good buy if you can find them at the right price,” said Kim Hourihan, chief investment officer for CBRE Investment Management.
CBRE Investment Management is in the fourth spot on P&I’s list of largest managers by worldwide assets with $113.6 billion, a 6.1% decline from a year earlier. CBRE ranked 14th for U.S. institutional tax-exempt assets, with assets up 3.2% to $15.9 billion.
Single family for rent is interesting and CBRE Investment Management has been investing in it for a while, she said. The sector has gotten past early worries that a disparate collection of homes would be too difficult to efficiently manage by using advances in technology, she said.
Self-storage, student housing and senior housing are also interesting niche sectors, she said. For example, senior housing is benefiting from demographic changes, mainly the large and aging baby boomer generation.
“Now we have to find a way to make it cool” for a generation that promoted 50 as the new 30, Hourihan said. “A whole lot of them are getting older.”
While alone no niche sector can represent a significant portion of investors’ portfolios, lumped together they could represent about 20% or 25%, Hourihan said.