Alternative sectors like cold storage, life sciences and data centers are red hot and yields are compressing significantly as investors seek to leverage growth of the new economy.


Top of Mind

Investors are increasingly allocating capital to alternative real estate through direct investment and entity-level acquisitions, driven by long-term growth prospects, technological improvements and higher yields.


Investor demand will increase for data centers, cold storage warehouses, life sciences facilities and single-family residential rental properties in the U.S. Yields will continue to compress in these growing sectors while remaining largely stable in other recovering sectors such as seniors housing and health care.

Popularity Of Alternative Real Estate Accelerates

Alternatives are specialty operational real estate with lower inventory, less turnover and higher yield than other asset types. Over the past five years, alternative investment averaged about US$93 billion a year globally. Capital flows into alternatives appeared more resilient. While total commercial real estate investment fell by 33% for the year ending in Q1 2021, alternative investment fell by less than 20%.

Investors are attracted to alternatives by higher yields, stable income and sustainable demand growth. CBRE’s 2021 Global Investor Intentions Survey found that investor interest surged for data centers, cold storage warehouses and single-family residential rental properties over the past two years. Demand also was strong for real estate debt and health care facilities.6
6 Health care includes life sciences and medical offices.

Figure 18: CBRE Investor Survey: Alternative Investment Preference, 2019-2021

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*Health care includes life sciences and medical offices.
Source: CBRE Global Investor Intentions Survey, 2021.

Yield Compresses Where Investment Demand Exceeds Supply

Alternatives accounted for 11% of global commercial real estate investment in H1 2021, largely driven by strong transaction activity of data centers worldwide and life sciences facilities in the U.S. and Asia-Pacific. Supply constraint remains the largest obstacle for investment to scale up, but inventory growth is accelerating in popular sectors such as data centers and cold storage, despite relatively high development costs.

Recovery of alternative sectors such as student housing and leisure7 will depend on vaccination progress and resumption of international travel. Demand has clearly rebounded or increased with lifted restrictions.

Yield is expected to compress significantly in the cold-storage and data center sectors where investment demand exceeds supply. Other alternative sectors will likely have stable yields in 2021, matching 2019 levels as things return to normal.
7 Leisure includes casino, theater, entertainment park and other recreational venues.

Figure 19: Global Capital Flows To Alternative Real Estate

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Source: CBRE Research, Real Capital Analytics, June 2021.

Figure 20: Alternative Asset Yields Compared With General Industrial

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Note: These yields are for U.S. assets, but can be used as a global benchmark.
General Industrial included for comparison only, not as an alternative asset.
Source: CBRE Research, Q2 2021.

Large Data Center Transactions Build Momentum

Driven by the ever-growing need for data storage, computing and networking, data centers are large beneficiaries of new age technology and remote working. Big Data, 5G, autonomous vehicles, artificial intelligence, augmented reality and remote working are all fueling current and anticipated future exponential growth of the industry.

Primary markets such as Northern Virginia, Silicon Valley, Frankfurt, London, Singapore and Hong Kong with strong infrastructure and fundamentals offer the greatest potential for investment and long-term liquidity. Industry consolidation and increasing capital commitment to the sector have led to significant yield compression.

Rent continue to decline due to standardization, larger developments and the lower costs of capital, but markets like Silicon Valley and Singapore that are difficult to enter are seeing rent growth. Hyperscale cloud service providers continue to drive leasing activity, with major users of data center space driving development.

Pandemic-Related Tailwinds Accelerate Investor Activity In Cold Storage

Cold storage continues to be a popular asset class for investors looking to diversify their portfolios with higher yields than traditional bulk warehouse buildings, although high demand has led to further yield compression. Investor interest is driven by an acceleration of direct-to-consumer (D2C) grocery shopping during the pandemic and increased consumption of perishables. E-commerce grocery sales will become more widely adopted in the U.S., following similar trends in densely populated Asian and European cities.

Institutional capital accounted for 32.5% of the investment in refrigerated warehouse buildings as of Q2 2021, up from 21.4% for full year 2020, according to Real Capital Analytics. Global investment volume in the sector increased by 56.4% year-over-year in H1 2021 and by an annual average of 28.9% over the past decade.

Emerging Opportunities Of Single-Family Rental Housing In The U.S.

The single-family rental (SFR) housing sector became the hottest residential subtype in the U.S. last year. Interest and investment in the sector will continue to rise significantly over the coming year. The sector will also become an established alternative product, albeit still evolving in form and investment opportunity.

COVID-induced lifestyle changes significantly favored SFR housing as families needed more space for work, studying and recreating. Increased demand translated into strong SFR market performance and brought the sector into the limelight. Yet demand was rising before the pandemic and will continue to climb in the future, driven by millennials who enter life stages where more housing space is needed and see SFR as an affordable solution to rising house prices.

Rent growth should continue to outpace inflation at potentially 4% a year. Vacancy rates are currently under 3%, attracting growing demand from institutional capital. Most SFRs are owned by very small “mom-and-pop” investors. However, large companies such as Invitation Homes, American Homes 4 Rent, Pretium and Tricon Residential are expanding, while a host of smaller companies are aggregating inventory. This trend will continue over the next year, in part due to the large infusion of equity capital to the sector. For example, Blackstone Group recently acquired Home Partners of America, which owns more than 17,000 single-family homes throughout the U.S., for $6 billion.

We estimate that more than $12 billion of equity capital was committed for SFR investment or development in 2020 and H1 2021, but deployment of that capital will likely be slower than anticipated given limited supply and market competitiveness.