Alternative CRE Assets Took a Bigger Hit Than Traditional Ones in Q1

MSCI recently covered overall CRE activity in Q1: deal activity down 56%, cap rates up 30 basis points.

In addition to more detail by property type, the firm also looked at alterative CRE sectors, including medical office, manufactured homes, life science/R&D, self-storage, student housing, age-restricted, cold storage, and data center. In 2020 Q2, they were 12% of CRE sales. Now they compose 8%, losing a third of their percentage representation.

These other choices for investors and developers and operators were supposed to open opportunities in part because the most popular types were overly popular with cap rates that were moving down. It makes some business sense that at more difficult times, they might take more of a hit than standard categories.

“There was a relative paucity of large portfolio and M&A deals at the start of 2023, in contrast to recent quarters, though a multibillion-dollar deal is in the pipeline,” the report said. “Megadeals in aggregate only made up 28% of total alternative investments in Q1 2023, bringing the megadeal share closer to levels seen before the pandemic.”

All alternative CRE categories posted double-digit sales drops since the previous year. So did the more regular types, however the ranges were different. For the office, retail, industrial, hotel, apartment, and seniors housing and care, the smallest drop was 8%, while the biggest was 68%.

For alternatives, the year-over-year transaction volume change ranged from 16% to a whopping 92% for data centers. Only medical office, life science/R&D, and self-storage saw transaction volumes of more than $1 billion. The last two saw some large megadeals that pushed up the numbers.

“Cap rates in the self-storage sector came in below those of apartment in the first quarter of 2023, a first for the period covered by our self-storage hedonic cap rate series,” the firm said. “Yields for self-storage, as measured by the RCA Hedonic Series, have been little changed over the last year, leveling out a little under 5%. Apartment cap rates, on the other hand, steadily rose in 2022, crossing above 5% in early 2023.”

However, multifamily pricing has been recently hurt due to rate hikes and more stringent lending standards. What is unknown is how self-storage and multifamily changes are related. They should respond to “similar demographic forces.”

“What is unknown is if the lack of increase in self-storage cap rates is a sign of a delayed response to the challenges seen in apartments or if investor preference is preventing an increase.”