In the context of portfolio diversification, direct real estate investing is still considered an “alternative” to stocks, bonds and cash. Actually, “alt” is a fair characterization, given the investment’s illiquidity, low transparency, longer hold periods and high complexity, but for people who do it all the time, the label can feel diminishing and inaccurate.

Funny enough, within the real estate universe, we have our own “alts,” or what are referred to as non-institutional property types. These assets typically fly under the radar of traditional, large-scale investors, but research from Clarion Partners shows they are significantly less sensitive to changes in GDP and have, on an absolute and risk-adjusted basis, outperformed traditional real estate sectors in good and bad markets.¹

Historically, apartments, industrial, office, retail and sometimes hotels constitute the core “real estate food groups,” expansive asset classes that have populated portfolios for institutions like REITs and pension funds. Real estate “alts” can be unique and single-purpose assets, like data centers, medical office or self-storage, or subcategories of larger asset types, like senior or student housing, single-family rentals, and cold storage. Clarion also categorized manufactured housing, life science and industrial outdoor storage as alts.

Since 2007, alts have delivered nearly double the returns of traditional property types, including strong outperformance during the GFC and the Covid recession.

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Just as important, most alternative real estate asset classes’ returns have low correlations to traditional real estate and to other alts. By contrast, the traditional real estate asset classes are more highly correlated to each other.

What’s driven the strong performance? Stable, consistent NOI. Which is no surprise - most of these assets have durable, need-based, accelerating secular demand drivers, as the paper notes. An aging population needs senior housing and spurs demand for medical office and life science assets. Unaffordable for-sale housing fuels single-family rental and manufactured housing demand. Exploding digital and AI usage requires data center capacity. Do you think any of those trends are about to reverse?

In addition, these asset types are operationally uncomplicated. Sure, managing for-rent communities and high-tech office buildings and data centers isn’t easy, but those operational competencies are well established and widely available from experienced third-party managers. Notably none of the alts are as complex as hotels, which many investors consider to be operating businesses, not real estate.

Honestly it feels a little unfair to group all these alts together and compare them as a group to traditional assets. The “alts” are a lot like the Breakfast Club - each one is pretty niche and distinct from the others. You could argue the same about the traditional asset classes too, although they represent a much larger proportion of the built environment than the alts do.

So which alts are going to grow up into a “food group” and which are not? So far they are proving slow to attract institutional adoption. They made up only 9% of open-end core funds holdings at the end of 2024, according to NCRIEF, barely up from 3% a decade earlier. And the “alt” world isn’t small, it makes up nearly one-third of the $11.7 trillion institutional “investable universe,” according to Clarion Partners.

But you can’t simply judge winners and alts by institutional ownership at one given moment, as that changes. In 2005 office REITs made up 21% of total REIT market cap; today that number is 4%. Industrial nearly doubled from 7% to 13% during that time. For new asset types, institutional investor interest is actually a cautious, lagging indicator of an asset type’s institutional appeal. And by lagging, it could be periods of ten or more years.

Besides forecastable cash flows and low-complexity operating models, to become institutional an asset class also needs scale. A large asset base offers diversification, allows many institutional investors to get exposure, and ultimately creates liquidity. On this front the traditional asset classes have much more inventory than the alts. Only single-family for-rent housing rivals the industrial sector in terms of investable inventory.

Based on the chart above it may be a minute before any of the other alts can catch up. But based on the graph below, don’t count them out. 

Who: Crimson Copilots

What: Brings high-powered talent to smaller real estate teams, affordably.

The Sparkle: Fractional senior employees and leaders, a fixture in other industries, is not as common in real estate. Crimson is fixing that. Started by three industry veterans, they pair client firms with “Copilots,” seasoned advisors or executives that fill critical missing roles on a fractional, interim, or project basis. Their stable of Copilots have sector expertise in all major asset types and functional expertise in the core real estate disciplines, including investments, operations (including hospitality), finance, technology and of course capital raising.

Do all real estate people love a good map? We suspect so.

This one divides Earth into vertical slices that at first look like time zones, but each contains 10% of the world’s population. Some slices are wide, spanning oceans and continents. Others are quite narrow, or in other words, crowded.

Link: https://bigthink.com/strange-maps/earth-divided-in-ten-zones-of-equal-population/

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