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.