Data Is Driving an Investment Boom in Niche Assets

Niche asset classes are dominating the post-pandemic investment activity. While many of these property types are serving as a flight to safety for investors looking to hedge against downside risk after a turbulent year, data is illuminating opportunities in these asset classes, opening the door for investors to diversify into non-traditional property segments.

“The push into non-traditional asset types has really been driven by investors with digital strategies, which has been catalyzed by the pandemic,” Indy Karlekar, global head of real estate research and strategy at Principal, tells GlobeSt.com. “The strong drivers of growth that have come through the pandemic are most manifest in these non-traditional property types. Investors have looked at the structural drivers that the pandemic has revealed and embraced it whole heartedly.”

Investor interest in niche assets is not a reactionary strategy to the dislocation from the pandemic. Rather, investors are following the fundamentals. “This is more of a structural story and less of a flight to safety story,” says Karlekar. “Demand for these non-traditional property types is not going to go away. The use of data has allowed investors to take a very specific approach to where they want to allocate dollars.”

“There is a quite a gamut of property types that we think have grown significantly over the last two years,” says Karlekar. The short list includes self storage, single-family rentals, manufactured housing, life science and data centers, and according to Karlekar, “Cap rates have compressed across all of these property types.”

While the fundamentals are strong these niche assets, investors are also able to underwrite strong rent growth, justifying the cap rate compression. “Over the last six months, we have seen very strong rent growth,” says Karlekar. “A lot of the acquisitions that we have seen have been the result of really strong rent growth that investors are underwriting.”

Next year, Karlekar expects interest in niche assets to gain momentum. “We are very confident,” he says, adding that he expects investment volumes in non-traditional assets to triple over the next four to five years.