7 emerging areas that are attracting real estate investors

With the commercial real estate reset underway, investors are seeking fresh opportunities from a new crop of asset classes. While the traditional RORI (Residential, Office, Retail, and Industrial) classes remain sizable, private equity and institutional investors are looking to diversify and find promising investments that can perform in a real estate market that’s changing under pressure from broader economic forces.

Investors are increasingly turning to seven emerging asset classes:

• Data centers
• Cold storage
• Industrial outdoor storage
• Single-family rentals
• Manufactured housing
• Boat and RV storage
• Marinas

Data centers

Danny Stover, Managing Director, Real Estate Corporate and Investment Banking, Truist Securities

Over the past ten years data consumption has exploded, ensuring a continued demand for data centers. The number of network connections and interconnected devices in American homes—from computers, phones, and TVs to smart appliances, doorbell cams, and the ubiquitous Amazon Echo and Google Nest devices—has grown dramatically. Averaging 22 such devices, today’s homes collect, receive, and use a vast amount of data that must be stored somewhere.^{Disclosure 1}

Demand drivers

Technological advances make the world more data dependent, and artificial intelligence and associated technologies like self-driving vehicles promise exploding data demands for years to come. As more corporations shift to cloud storage, the need for data centers is strong and rising. Companies understand that with proper security measures, data may be more safely stored in the cloud than on company premises—and at a substantially lower cost.

Why investors care

Investors once viewed data storage as a specialized component of the technology, media, and telecom (TMT) sector but now recognize physical data centers as a real estate asset class supported by long-term leases to investment-grade tenants. This change in perspective shifted data centers from a low-levered asset class financed in the TMT space to one that garnered strong interest from lenders who could offer far more leverage to the end user. Robust demand, desirable tenants, and attractive economics have drawn major banks and other investors into the space. Private equity firms have been particularly active in data center mergers and acquisitions in the past 2-3 years.

Large data centers are concentrated in a handful of urban markets across the country—notably Atlanta, Chicago, Dallas, Phoenix, and Portland, in addition to Silicon Valley and Ashford, Virginia. The need for data centers closer to end users increases as consumers demand faster delivery of streaming content from Netflix, Spotify, and dozens of other platforms. That’s driving data center growth in tertiary markets, like Birmingham and Huntsville, Alabama and Greenville and Myrtle Beach, South Carolina.

Cold storage

Sixty percent of the U.S. cold storage industry is concentrated with the top ten owners. The remaining 40% of the market is highly fragmented among smaller, regional owner-operators, often with one to three cold storage facilities each.

Demand drivers

With restaurant dining severely curtailed early in the pandemic, the pivot toward online grocery shopping and at-home meal delivery helped to maintain the demand for cold storage and highlighted its importance in the cold chain. Several years later, the demand remains strong, and vacancy rates are low. The facilities have evolved from simply storing frozen and refrigerated products to generating additional revenue through value-added services such as repackaging bulk products into smaller portions.

Why investors care

In the past, it was common to find food producers owning and operating facilities for their own products. Investors specializing in infrastructure were also attracted to the operationally intensive nature of the cold storage real estate. The cold storage industry survived the global financial crisis with little to no impact and has demonstrated resiliency through the various economic cycles since then. Revenue stability, higher yields than traditional warehouse investments, and a growth outlook are just a few of the features attracting institutional investors.

Private equity, institutional investors, and large family offices now view cold storage as an attractive real estate asset class that provides a critical service in the cold chain and are committing significant amounts of capital to platforms designed to acquire regional cold storage operators and develop new ones.

Demand continues to be strong as regional players attract institutional investors to facilitate their strategic growth objectives. High build-out costs make it difficult for smaller, regional operators to obtain the capital to expand. With support from an institutional partner, regional operators with an eye towards growth can invest in new developments or acquire smaller operators at a much faster pace than on their own.

Industrial outdoor storage

Nadia Mahmoud, Managing Director, Real Estate Corporate & Investment Banking, Truist Securities

Historically, industrial outdoor storage has been a fragmented space dominated by individually owned and operated properties. These facilities are essentially large, open yards where equipment owners can store trucks, trailers, materials, containers, and other inconveniently sized assets. Still more niche than sector but growing rapidly, industrial outdoor storage facilities represent one of the newest areas attracting investors.

Demand drivers

Industrial outdoor storage is a $200 billion market that fills a critical need supporting e-commerce, infrastructure, construction, logistics, and transportation. Zoning restrictions often limit locations for these facilities leading to a supply shortage for outdoor storage that has companies scrambling to find the storage they need. The high demand for outdoor storage motivates tenants to keep current on rent or risk losing their leases.

Why investors care

Smaller owner-operators focused on cash flow are willing to accept month-to-month or short-term leases, but single facilities carry relatively low values—roughly $40 million per deal at the lower end. An abundance of investment-grade companies in need of storage space for vehicles and equipment means many tenants are willing—and able—to pay the higher rental rates and commit to longer leases.

Institutional investors are aggregating and consolidating individually owned properties, then raising rents and extending lease periods. These investors appreciate the low overhead and capital expenditure requirements for these properties with minimal costs for construction, repair, and improvements. Aggregators are challenged by small deals sizes as they work to build substantial operations that are financially worthwhile for large, institutional investors.

Single-family rentals

During the Great Recession, investors acquired vast portfolios of foreclosed homes, leased them for rental income, and in the process, institutionalized the single-family rental (SFR) industry with a scattered-site approach. A second segment, build-to-rent communities, has seen explosive growth in the past couple of years. These new home communities, some with 200 units or more, are intentionally built as rentals. Today the industry includes several large, publicly traded REITs along with a number of institutionally backed platforms. 

Demand drivers

Millennial and Gen Z buyers in their family formation years are turning to single-family rentals as a natural transition out of traditional apartment living to gain access to more living space, private yards, and better school districts. The demand for single-family rentals is even more pronounced in the current market environment. Increasing home prices and rising interest rates are taking homeownership affordability out of reach for many. Adding to the problem is a lack of homes for sale as owners stay put, locked into low mortgage rates that they’re reluctant to swap for new loans at today’s significantly higher rates. This environment leaves many potential homeowners unable to buy homes.

Why investors care

Today, institutional ownership has only scratched the surface and accounts for only 3% of the total market share. Strong financial and operating fundamentals continue to support investor interest in both scattered-site SFR and build-to-rent communities. Scattered-site SFR, where the industry started, has seen significant improvements in technology and property management capabilities, helping institutional investors operate and manage these assets more efficiently while supporting future investments. 

The investor landscape is shifting as many institutional investors are seeking build-to-rent acquisition opportunities in today’s environment. Newer construction, minimal capex, and ease of management are just a few of the supporting factors that attract investors. In addition, there are more attractive debt-financing solutions available for build-to-rent communities compared with the scattered-site single-family model.

Manufactured housing

During COVID, manufactured housing maintained one of the lowest default rates in the industry. For the past five years, institutional capital has flooded into the sector as a recession-proof haven that provides a safe, reliable return to investors. In fact, manufactured housing is the only asset class on the REIT level that’s seen uninterrupted, positive net operating income growth for close to two decades, recessionary periods included.

Demand drivers

This country’s shortage of affordable housing—extreme, in certain markets—is no secret. Manufactured housing offers an affordable solution that’s also quick and cheap to build. The supply is limited, and between capital improvements and industry marketing efforts, manufactured housing is losing the stigma it once carried.

Why investors care

Manufactured housing faces the same high-interest rates hurting traditional apartments, but compared to multifamily housing, cap rates have widened less for this sector due to manufactured housing’s consistent cash flow. Though cash-on-cash yields are low, larger institutional groups are hedging against inflation by parking money in class A properties concentrated in a handful of sunny locales: Arizona, California, Texas, and coastal regions of Florida.

More broadly, the sector attracts middle-market investors as well. Opportunistic players are directing institutional equity or family office funds at value-add plays nationwide, picking up neglected communities with reduced occupancy rates and making improvements to command market rates at full occupancy. Still, higher capital costs mean returns aren’t where they were four years ago, and some investors are struggling to reset their expectations around this new reality—and getting approval from local governments for new developments can be a barrier to sector growth.

Boat and RV storage

Dedicated boat and RV storage properties are an emerging property offshoot from the traditional self-storage properties and have been gaining traction with institutional investors seeking exposure to niche investment opportunities. Recreational boat and RV sales surged during the pandemic as the work-from-anywhere phenomenon took hold, highlighting the need for storage options.

Demand drivers

Finding storage for boats and RVs can be a challenge for many owners. Urban regulations and safety concerns preclude streetside parking, and many homeowners’ associations prohibit boat and RV parking in streets or private driveways. As a result, boat and RV owners often seek alternative storage options, typically near their residence.

Why investors care

Like many of the other niche property types, boat and RV storage is a highly fragmented industry with only a few institutionally backed platforms. Steady demand, lower capex and consistent, recurring revenue make boat and RV storage facilities appealing to institutional investors. Their operations have lower overhead costs and are less management intensive than other traditional storage facilities. Institutional investors see an opportunity to consolidate smaller, mom and pop-owned properties and create efficiencies through scale.

Marinas

The marina industry exhibits attractive industry dynamics with limited increases in slip supply and strong demand driven by expanding boat ownership and increasing vessel size. Further, the industry’s fragmented nature—the top five operators own less than 4% of the marinas in the U.S.—presents a consolidation opportunity for investors.

Demand drivers

The development of new marinas and the creation of additional slips has been stagnant for many years, particularly in the coastal markets where the highest and best use is likely a condo tower or resort.  Lack of new supply combined with the steady and growing number of boat owners has led to multi-year waiting lists for slips at many of the marinas located in prime boating markets.

Why investors care

The scarcity of coastal marina space lends pricing power to marina operators. Coastal marinas generally serve a higher net worth clientele—less susceptible to recessionary conditions—providing stable, recurring revenue from slip rentals along with ancillary revenue streams that drive incremental yield. These include ship stores, restaurants, boat clubs and rentals, as well as boat sales, service, and repair. To meet the growing demand, investors see opportunities to increase profitability by adding dry stack storage slips through ground-up development or redeveloping outdated facilities that are unable to accommodate today’s larger vessels.

The high cost of entering the coastal marina space acts as a natural barrier to entry, with inland and freshwater marinas providing slightly higher yields but with lower barriers to entry. Institutional investors are drawn to the marina industry because of the highly fragmented ownership, superior demand drivers, and the incremental value-add opportunities that dry stack storage offers.