Real estate investors have long been aware of the “four main food groups” of institutional real estate: the apartment, industrial, office and retail sectors. While that once defined the bulk of the commercial real estate inventory, that view of the investable marketplace has become outdated. Real estate uses change as demand ebbs and flows for various sub-sectors as we have seen recently in the decline of office and retail uses, but emergence of cell towers, life science buildings, data centers, and self-storage facilities.

In fact, evidence of the growth of specialty sectors can easily be seen in the public REIT space where traditionally “alternative” sectors now comprise 60% of market capitalization.

Further, private institutional real estate indexes are also recognizing the emergence of alternative sectors with over 10% of the NCREIF Property Index comprised of these sectors.

Key Specialty Subsectors, Drivers and Trends

Bluerock is bullish on several specialty sectors because many are not economically cyclical, and instead are driven by long-term structural and macro trends. Below we explore our favored specialty sectors.

Life Sciences

Life sciences buildings can be low rise structures focused on lab space, clean rooms, or general R&D or more mid-rise office building-like structures with specialized buildouts. Growth in life sciences real estate is being driven by demographics, biotechnology innovation, and public health research funding. Life sciences employment growth rates are projected to exceed total employment growth rates in 2024 and through 2030, which is a positive driver for space demand. Because of this, annualized net operating income (NOI) projections are nearly 4% through 2028, as reported by Green Street, a respected real estate research firm.

Explosive growth in new drugs approved by FDA, driven by low-cost genomic sequencing, is also driving increased demand.

Student Housing

Student housing structures are very similar to apartments, however typically rent by the bed and are uniquely designed for multiple students per larger unit. They are also typically located very near or on University campuses and tend to have higher densities than traditional garden-style apartments. Student housing’s year-over-year rent growth exceeded the growth rate of conventional apartments in 2022 and rents are forecast to grow 6%-8% in 2024.¹ Several factors have contributed to this recent growth including low levels of new supply (declining 17.0% from the 5-year average of 35,700 to approximately 29,700 beds in 2023) and record enrollment at many highly selective universities. Large, flagship public schools reported the highest rent growth (over 8.0% year-over-year) and occupancy rate (96.3%) at the beginning of the academic year, 210 basis points ahead of non-flagship public schools (94.2%). This outperformance highlights the importance of market selection.

Senior Housing

Senior housing can take many forms including independent living, assisted living facilities, memory care, continuing care retirement facilities, and skilled nursing facilities. Senior housing rent growth is also projected to be strong in 2024 driven by the significant population of aging Baby Boomers and limited recent supply. Limited new development from higher interest rates and moderating labor costs also provide a favorable backdrop for senior housing. Longer term, mortality trends and the services and conveniences of senior housing should propel sector strength well into the future. Because this subsector is so demographically driven, it tends to be more immune from economic cycles.

Data Centers

Data centers are industrial-like buildings with very specialized buildouts containing large and multiple computer servers. The National Council of Real Estate Investment Fiduciaries (NCREIF) defines data centers as “buildings designed for the operation of data servers and related network equipment. Buildings feature a high and redundant power supply, capable of operation in the event of power grid failure. Data centers also have significant cooling capacity and fiber optic connectivity. They usually feature raised floors or drop ceilings to facilitate horizontal data and power distribution. Lease rates may often be designated in megawatts, rather than square footage.”

The chart below shows that data center space absorption has soared in recent years due to increasing demand related to technological advances including artificial intelligence (AI) and data mining. As society’s collective data footprints and storage needs increase from personal information, photos, and videos, data centers are a sector well-positioned to capitalize.

Self Storage

Self storage refers to projects with multiple storage units leased to individuals and businesses. Like many other real estate building types, the physical product has evolved over the years from shed like structures to multi-story, class A buildings sometimes specially equipped for wine or antique storage. Sector demand is attributable to what has been called the four “D”s: death, divorce, dislocation, and disaster. Relocations and life changes for any reason generate significant demand for self storage and demand tends to be driven locally by population growth. Moving and lack of space (Other) are the top demand drivers for the sector.

The renter profile spans all generations as well as an increasing rate from Generation X to Millenials.

Medical Office

NCREIF defines medical office buildings (MOBs) as office buildings in which 90% or more of the occupied space is leased to medical tenants. Medical tenants are defined as tenants whose primary business activity in the space is delivery of medical care to patients. This includes providing diagnosis and treatment for medical, dental, or psychiatric out-patient care. It does not include medical services that require an overnight stay.

While the traditional office market has struggled in recent years, MOBs have performed well with much stronger occupancy rates and solid rent growth. Aging demographics and increased outpatient procedures should generate strong future demand for MOBs, independent of economic cycles.