Most Promising Real Estate Opportunities? Hint: Not Always in Traditional Segments

Real estate falls squarely in the value investing column nowadays. But once the asset class rebounds, what are the canniest segments to hold, with the strongest growth prospects globally?

That would be more niche property classes than the conventional ones, says a study from Northern Trust Asset Management that covers real estate investment trusts, the most common liquid means of investing in property and a good proxy for other investment vehicles in the space. Based on the study, NTAM believes two traditional types—industrial (mainly warehouses) and residential (apartments)—will do well, while offices and retail will still face challenges.

But smaller segments show much more promise, according to the NTAM research paper, written by Dan Phillips, director of asset allocation strategy, and his team.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“Growth has been strong outside of traditional property types, as investors have shifted their focus to more needs-based sectors, and those sectors set to benefit from demographic trends,” the study says.

We’re talking data centers and cell towers, life sciences, senior housing and self-storage. Indeed, the diversified/other category in the firm’s study, which encompasses those four up-and-coming areas, has outperformed the traditional classes this year through the third quarter.

Everything is down, of course, but diversified has lost the least in 2022, off 23.1%. Over three years, on an annualized basis, diversified ranks second at -8.7%, trailing only residential’s 3.7% growth.

The growth story for data centers and communications towers is impressive. Data center net absorption (the capacity that’s rented out) has tripled since the first half of 2021, the study says, citing real estate company CBRE. Data use/mobile traffic is expected to grow 23% annually through at least 2027, per the Ericsson Mobility Report.

For instance, American Tower, the largest cell tower REIT, is down 17% this year amid worries about an economic slowdown, but that stock price has more than tripled over the past 10 years. Fundamentals are good: American Tower offers a dividend yield of 2.7%, a full percentage point better than the S&P 500’s. In the third quarter, net income increased by 12.9% and revenue by 10.2%. (The NTAM paper didn’t cite this or any other specific REITs.)

Meanwhile, there’s a lot of action in buildings rented out to health-care providers, who have a bright future given the aging of the population. Average vacancy in the top 100 metros in the first half of 2022 was 8%, an improvement of 0.4 from the comparable period in 2021.

“The lowest-cost setting with the highest-quality care should gain market share of an aging population,” the NTAM report states. Plus, “consumers continue to prefer retail-like locations from leading health systems,” which allows for a lot of flexibility as medical providers have their pick among storefront locations nowadays.

In the same vein, senior housing is enjoying huge demand. Senior housing occupancy grew by 0.7 in the third quarter, to 83.8%. Housing construction starts in this category decreased 64%, the NTAM study says, “while the market comes out of the pandemic and digests recent debt refinancing and cost challenges.” This pause “should be beneficial for fundamentals.”

The home-buying market, which has slowed somewhat yet remains healthy, benefits self-storage. Cushman & Wakefield finds that, in the second quarter, national asking rents were up 5.6% amid flat occupancy. No one, though, expects occupancy to remain flat. Construction starts were up 14% as developers ramp up to meet anticipated demand.