Skip to main content
MENU
Subscribe
  • Login
  • My Account
  • Logout
  • Register For Free
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • CIOs
    • Consultants
    • Defined Contribution
    • ESG
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Private Credit
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • Special Reports
    • Washington
    • White Papers
  • International
    • U.K.
    • Canada
    • Europe
    • Asia
    • Australia - New Zealand
    • Middle East
    • Latin America
    • Africa
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2024
    • Eddy Awards
  • Resource Guides
    • Active Thematic Global Equities
    • Retirement Income
    • Fixed Income
    • Pension Risk Transfer
    • Pooled Employer Plans (PEPs)
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. REAL ESTATE
September 30, 2019 12:00 AM

Investors, managers go where the technology is

Cell towers and data centers become hot properties for those shying away from core

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Cell tower
    Bill Oxford
    Cell tower REITs now make up 15% of the U.S. REIT market, and real estate managers are eager to get into that niche sector.

    Real estate investors and managers are increasing investments in newer property types that will benefit from the growth of the tech economy.

    Investors in real estate investment trusts, for example, have more exposure to categories of properties such as cell towers and data centers that didn't exist 20 years ago. Asset owners top-heavy with core properties have a smaller percentage invested in niche sectors, but even in core funds managers are filling out their small allocations to new construction of these niche property types that they expect will evolve into core real estate.

    At the end of 2018, real estate equity investors had larger portion of their portfolios in "other" buckets than in industrial, the highly popular traditional asset class, according to the 2019 Investment Intentions Survey by the Pension Real Estate Association, European Association for Investors in Non-Listed Real Estate and Asian Association for Investors in Non-Listed Real Estate Vehicles.

    This year's survey showed that global investors had 11.1% in the "other" category, compared to 10.3% in industrial. North American real estate investors had 17.5% in other but only 13.1% in industrial. Five years ago, a survey of just PREA members showed that North American investors had 12.6% in other and 12% in industrial.

    Investors are turning to property types outside of the traditional four — industrial, retail, multifamily and office — to boost returns, said Greg MacKinnon, Hartford, Conn.-based director of research for the Pension Real Estate Association.

    In an overall low-return world, investors are looking for places not popular in the past for returns such as student housing, mobile homes and data centers, a newer niche section, Mr. MacKinnon said.

    According to PREA's quarterly consensus forecast of U.S. commercial real estate returns, investors continue to expect real estate returns to decline, he said. A 6.5% total return is expected in 2019, which will fall to 5.3% in 2020 and 4.5% in 2021, the third quarter report shows. Industrial, too, is expected to decline but will remain the best-returning sector, Mr. MacKinnon said. The 2019 return forecast for industrial in 2019 is 11.7%, dropping to 8.2% in 2020 and 6.1% in 2021.

    Making choices

    Indeed, property-sector selection will get more important in the future because changes in the economy will not affect all property types in the same way, he said.

    For example, the office sector will slow along with the economy, while apartments are more protected in an economic downturn, Mr. MacKinnon said. "People will not suddenly move out to buy a house," he said.

    Investors are moving into alternative property types, which many believe could still perform well in an economic downturn. These alternative real estate categories have grown to be a significant part of investors' real estate portfolio but they are not as large as office and retail.

    The PREA/INREV/ANREV survey showed that the largest category is office, which is in 34.4% of global investors' portfolios and 28.3% of North American portfolios.

    Carlyle Group's open-end core-plus Carlyle Property Investors Fund is structured differently than a typical core-plus fund; it is weighted toward niche property sectors expected to be less sensitive to changes in economic growth, according to a Townsend Group report to New Mexico State Investment Council, Santa Fe, which runs $26.1 billion in endowment funds. The council at its Sept 24 meeting committed up to $100 million to the fund.

    "Overall, Carlyle was selected given their exposure to niche property types that are less sensitive to GDP movement, historical performance, strength of the platform and team," the Townsend report states. Townsend is the council's real estate consultant.

    There is keen investor interest in data centers, cold storage or any property category that could benefit from the technology economy and might withstand moderation of economic growth, said Zachary Streit, Los Angeles-based senior vice president of George Smith Partners Inc., a real estate advisory firm that assists investors with financing and arranging real estate deals.

    The economy has been in recovery for more than 10 years and investors are searching for alternative asset classes that might outperform traditional real estate sectors in a downturn, said Mr. Streit, who said he personally has arranged and closed more than $1 billion and underwritten in excess of $6 billion of debt and equity financings for real estate transactions.

    One brand new area is co-living in which tenants share spaces, providing them with affordable rent while creating community with close proximity to amenities, he said.

    It plays off millennial trends while giving young workers affordable housing in often pricey locations.

    Institutional money managers are not yet investing in the area, but it's "one to watch," he said.

    In June, for example, startup firm Starcity won approval from the cities of San Francisco and San Jose, Calif., to build co-living projects. The projects offer furnished private bedrooms and private bathrooms with communal cooking, dining, lounge and laundry spaces on each floor.


    REITs rule

    Asset owners have greater exposure to niche property sectors through real estate investment trusts than private real estate, REIT managers say.

    "The private real estate market is playing a little bit of catch-up,"said Jon Cheigh, a New York-based executive vice president and head of global real estate for publicly-traded real assets manager Cohen & Steers Inc.

    REIT investors have low exposure to retail, which makes up about 15% of the U.S. equity REIT market, and more exposure to data centers, health care-related and industrial properties, Mr. Cheigh said.

    Some investors are starting to look at REITs as a way to gain access to niche real estate sectors. Recent REIT outperformance over real estate equity hasn't hurt. The FTSE Nareit All REITs Index returned 12.65% and the FTSE Nareit All Equity REITs Index returned 13.01% in the year ended June 30. By comparison, the NCREIF Property index returned 6.51% and the NCREIF Open-end Diversified Core Equity index rose 4.14% in the year ended June 30.

    Over the last three to four years, retail REITs have been selling properties and therefore are getting smaller. Other REITs concentrating on newer sectors such as data centers are taking up some of that market share, Mr. Cheigh said, adding that REIT market is reflecting future U.S. economic needs.

    The number of data centers is growing as the amount of data generated by the 21st century economy continues to grow, he said. Today, data centers make up 7.5% of the U.S. REIT market, which is larger than the 5% mall REIT sector and the 5% shopping center REIT sector, Mr. Cheigh said.

    Another growing segment is cell tower REITs, which now account for 15% of the U.S. REIT market, Mr. Cheigh said.

    "You can own a big shiny mall but it better be close to cell towers" so shoppers can find their way to and around the mall, he said.

    Core managers buy in

    A big component of investors' private real estate portfolios is in core, which are properties established in sectors that are well understood, Mr. Cheigh said.

    "Investors are in a little bit in danger of being left behind" on where the economy is going, he said.

    However, some core managers say they are embracing the newer property types. Nuveen Inc., which is top-ranked in Pensions & Investments' list of core real estate managers for U.S., tax-exempt clients with $71 billion in core AUM, is making a big push into alternatives such as cell towers, billboards and health care-related properties, said Melissa Reagen, New York-based head of research, Americas, Nuveen Real Estate.

    The tailwinds in these sectors will remain whether or not there is a downturn, she said.

    Nuveen offers a variety of investments; in addition to open-end funds, it also offers closed-end funds with more niche strategies.

    Investing in alternative strategies is an expectation that they should produce higher returns than traditional asset classes, Ms. Reagen said.

    The new markets are fragmented and one way to boost returns is to buy smaller operators and consoldiate them into larger portfolios, she said. Acquiring a REIT specializing in alternative sectors is another way to gain a large portfolio as well as an operator to oversee it.

    PGIM, which ranks third on P&I's new list of core managers for U.S., tax-exempt clients is also investing in alternative real estate sectors for the expected premium on returns, said Eric Adler, London-based chairman of PGIM Real Estate and PGIM Real Estate Finance and CEO of PGIM Real Estate. PGIM has an expertise in senior housing and is investing more in data centers, he said.

    "The technology story is compelling," he added.

    PGIM executives are spending a lot of time on refrigerated industrial to take advantage of a move to sell food online, he said. There are not a lot of properties to buy and so there aren't many deals.

    But if online shopping continues to move into grocery, there will be a more demand for refrigerated industrial properties.

    With the exception of senior housing properties, some of these niche property types are being held in PGIM's open-end funds, he said. PGIM has core, core-plus and value-add open end funds. What's more the open-end funds are unconstrained in terms of asset class, Mr. Adler said.

    Related Articles
    Fractured year sees assets increase 7.2%
    Investors see big future for debt strategies
    Recommended for You
    Josh Pristaw speaking into microphone and gesturing.
    Clarion Partners appoints former Pretium executive as president
    Headshots of Steve Reents, left, and Toby Phelps
    Real estate specialist BGO makes slew of executive changes
    Christy Hill
    CBRE Investment Management names head of Americas logistics asset management
    Sponsored
    White Papers
    The State of Lifetime Income Report
    The Next Wave of LDI Evolution
    Retirement security to future income wins, TIAA brings you the latest financial…
    U.S. Public Funds Top Performers: Q2 2024
    Generative AI Investing: Opportunities at a Key Tech Inflection Point
    Research for Institutional Money Management: Advancing Physical Risk Modelling,…
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2025. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • CIOs
      • Consultants
      • Defined Contribution
      • ESG
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Private Credit
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • Special Reports
      • Washington
      • White Papers
    • International
      • U.K.
      • Canada
      • Europe
      • Asia
      • Australia - New Zealand
      • Middle East
      • Latin America
      • Africa
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2024
      • Eddy Awards
    • Resource Guides
      • Active Thematic Global Equities
      • Retirement Income
      • Fixed Income
      • Pension Risk Transfer
      • Pooled Employer Plans (PEPs)
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print