Alternative Prospects: 3 Niche Property Sectors Are Thriving

During a bull market, estate investors don’t have to look far to find an opportunity. When the market is behind you, capital seems to reproduce, no matter the deal. Bear markets, on the other hand, take a little more finesse. In addition to adhering to core investment practices and conservative underwriting standards, investors must consider alternative assets to find yield. 

Real estate is no exception to this bear-market phenomenon (or, rather, predicament). In light of rising interest rates and expectations of a recession, primary real estate sectors are correcting. Office, retail, industrial, and to a much lesser extent, multifamily are facing falling property values, rising cap rates, and increased investment risk. While every property sector will face some impact from rising rates, there are a few key niche assets still well-positioned to generate healthy returns. 

In particular, Ed Chazen, a senior lecturer at Boston College Carroll School of Management and an expert on real estate investment trends, is bullish on senior housing and medical facilities due to strong demand fundamentals. Here is a look inside three favored real estate investments for the bumpy road ahead.  

Senior Housing

In 2020, the pandemic derailed senior housing activity. Covid-19 disproportionately impacted senior communities, with devastating outbreaks moving through nursing homes and assisted living communities. Once the dust settled—and more importantly, vaccines became widely available—demand voraciously returned to the senior housing sector. “It has a lot of growth potential because of the favorable demographics,” says Chazen.”

Senior housing benefits from a rapidly growing elderly population and increasing life expectancy. Every day, 10,000 people in the US reach retirement age., and those people are living longer and more active lives. The combination has created an enormous population of seniors, and they are looking for a quality living experience as they age. “One of the great things about continuing care communities is they have a built-in social life,” says Chazen. “They have [places] where people can meet and congregate and have social activities.”

As of March 2023, senior housing occupancy has increased for seven consecutive quarters after toppling in 2020. Today, senior housing occupancy is a healthy 85%, and NIC says that positive momentum is continuing to drive long-term optimism. The quarter boasted strong absorption of 3,900 units. However, the senior housing sector has only added an additional 10,269 units since the start of the pandemic, as many investors have waited for stability to return. Strong demand paired with limited new construction could create a supply shortage. While investors have paused buying activity due to increased debt costs and a liquidity crunch, developers have an opportunity to pursue new developments today and deliver into a more favorable market as senior housing continues to build momentum.

Healthcare Real Estate

In 2022, transaction volumes for healthcare real estate reached an all-time high, according to data from JLL. In recent years, the expansion of healthcare systems has driven tremendous demand for new facilities. “More and more hospitals are continuing to establish satellite locations for non-urgent and non-acute care,” says Chazen, adding that it is too expensive to provide these facilities on the hospital campus. 

Outpatient centers improve customer service. They are located in population centers, giving patients better access to critical resources and care. Outpatient centers also allow hospitals access to modern facilities to easily integrate new technologies, and attract top medical talent, because doctors and hospital administrators can eliminate a lengthy commute to a hospital campus. In the previous five years, outpatient Medicare payments increased from 28.5% to 33.3%, and research from JLL expects hospital systems to continue to shift to this model of care to grow revenues. This is a trend that is only recently gaining momentum, and Chazen is optimistic about continued movement in this direction.  

Investors seem to agree. Healthcare facilities make up nearly half of total healthcare investment volumes, with the greater half coming from medical office acquisitions. REITs have also expanded exposure to healthcare real estate in the last 12 months, now owning 13% of the healthcare market, up from only 2% in 2019. Although some investors are expressing concern about rising interest rates and the subsequent impact on asset valuation, strong rents—estimated to increase 4% this year, according to research from JLL—will serve to moderate cap rate growth.

Honorable Mention: Self Storage

Chazen didn’t mention self-storage as one of his top return-generating properties, but the asset class benefits from the same positive demand fundamentals as senior housing and healthcare real estate. Apartment living, migration to new cities, and downsizing baby boomers are all driving tremendous demand for self-storage space. Today, 21% of Americans use a self-storage facility, and in the last 12 months, searches for self-storage facilities online reached a record high. Storage Café estimates another 15% of Americans are currently looking to rent a self-storage space. 

Self-storage inventory has grown by more than 15% in the last five years, a total of 252 million square feet. Last year alone, 38 million square feet of space came to market, and this year, another 52 million square feet of space will be completed in the US. Unsurprisingly, the top markets for self-storage are also regions that have seen strong inward migration. Ormond Beach, Florida; Clayton, North Carolina; and Covington, Georgia, are the top three markets. 

Despite the demand, the asset class has fallen off of many target investment lists this year due to decreasing investment activity. In 2022, investment sales fell by 19% year-over-year. However, that wasn’t a true indicator of decreasing appetite, but merely a softening from record activity in 2021. In 2021, self-storage investment volumes were the highest in history, but sales volumes in 2022 were still more than double any other year prior to 2021. Although self-storage may have passed its peak, there continues to be a strong investment appetite and strong underlying fundamentals to support it. 

Looking for the right opportunities is only part of the equation. Investors and developers utilizing automation, data and analytics, and robotic intelligence will gain a competitive advantage. These tools help to source, vet, and manage investments more efficiently and accurately, allowing investors to move on opportunities, reduce costs and achieve targeted outcomes. Northspyre utilizes these tech innovations to reduce administrative tasks, manage schedules and budgets and create forecasts to help guide development projects to their best results. 

Exploring new investment profiles, choosing the right opportunities, and leveraging data to support investment decisions are the key to achieving outsized returns in a turbulent market. Investors and developers that look for properties with strong underlying demand dynamics, like those listed above, will succeed. 

Discover which asset classes are likely to produce the highest returns despite macroeconomic uncertainty in our whitepaper on the 4 Recession-Proof Asset Classes You Can Count On As a Real Estate Developer.