Data Centers, Student and Senior Housing Will Be Hot Areas, Says Investment Chief

Alternative real assets—as in, beyond standard legacy options like offices and shopping malls—are a rising investment area. Three sectors stand out, according to Christopher Merrill, owner, chairman and CEO of Harrison Street Real Estate Capital LLC, in an interview. Two are related to demographics: student housing and senior housing, and the third to technology: data centers.

A degree of macroeconomic optimism propels these investment choices, but the good thing about them is that they all are not cyclical. “The resilient investment outlook for alternative real assets remains robust across various economic scenarios,” said Merrill, whose investment management firm has focused on alternative real assets since its founding in 2005, with $55 billion in assets now under management.

Data centers. The need for storage is multiplying fast. Advanced technology, especially artificial intelligence, is driving a boom in data centers, which will be at the crux of the digitization of everything, from overseeing electricity delivery to running factories to managing air traffic. So the industry should expect investments in data infrastructure to mushroom by 60% annually in coming years from $2 trillion now, per a report from asset manager BlackRock.

Alongside the data center growth will be a surging need for energy, and Wall Street expects a lot of it to be derived from renewables. “We are seeing the AI buildout boost demand for renewable energy,” wrote David Giordano, global head of climate infrastructure at BlackRock. Commercial property broker CBRE, which sells data centers (and just acquired Direct Line Global, which builds them), estimated that the centers will expend more than 3,000 megawatts of power this year, up 50% from two years ago.

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Data output has been growing at a 32% annual rate over the past 10 years. This all means data centers should produce an ever-larger revenue stream. Prices to rent data center capacity over the past decade have risen by one-third, CBRE reported.

As such, CBRE predicted, new data center development likely will attract more institutional investment in 2024, as investors are under-allocated to digital infrastructure by 1.5% to 3%, compared with other asset classes. Allocators are moving into limited partnerships, with seven- to 10-year terms, devoted to data center production, Merrill said.

Some institutions have “been on the sidelines” for these three types of alt real estate, he said, and dropping interest rates should bring them into these investments.

Student housing. Undergraduate enrollment, after a decade-long slide, is expected to swell by 9%, to 16.8 million by 2031, the National Center for Educational Statistics estimated. The demand for more dorms and the like is coming from large public universities, both in the U.S. and abroad, not smaller schools, Merrill said.

Leasing of rooms has been climbing, up 2.4% this past school year from 2022-23, and rents jumped 6%, according to research firm Yardi Systems. Merrill’s firm has partnerships that own dorms and campus power plants. He avoids small private colleges, he said, “because a lot of them have folded.”

Senior housing. Merrill pointed to what he called “a silver tsunami” as the U.S. ages. Capitalization rates for senior housing averaged 5.0% in 2021, a figure that has increased by about 2 percentage points since then, per a study from Jones Lang LaSalle, the real estate investment manager. By the mid-2030s, he said, the nation’s 80-plus population will have almost quadrupled, to 21 million.

Senior housing, along with health care facilities, have seen slower construction in recent years, which means a lot of catch-up will occur, Merrill argued, thus “creating a supply tailwind for coming years.”