**Deloitte Anticipates Investor Shift to CRE Alternative Properties**
*By Connect CRE Staff*
*Tim Coy*
When the term “commercial real estate investment” is mentioned, most commonly it brings to mind multifamily, office, industrial, and retail properties. Historically, these core assets have offered investors a mix of consistent rental income, value appreciation, and performance stability. According to Deloitte Financial Services, a diversified portfolio in these traditional categories has been the cornerstone of predictability and steady returns.
However, change is on the horizon.
In a newly released report titled *Next-Generation Leaders May Accelerate Real Estate Investment in Alternative Properties*, Deloitte outlines how shifting economic conditions and evolving demographics are steering investors toward alternative real estate assets. These include data centers, cell towers, life sciences facilities, and single-family rentals – sectors that are growing in popularity alongside more established alternatives such as self-storage units, senior living communities, and student housing.
### Shifting Investment Strategies
Tim Coy, Real Estate Research Manager at the Deloitte Center for Financial Services and one of the report’s authors, explains that the growing interest in non-core property types stems largely from the pursuit of liquidity and yield. “Following the Global Financial Crisis in 2008, large owners and investors were seeking higher yields,” Coy told Connect CRE. “These yields were generally found in sectors that were less developed compared to the core property types.”
Coy further elaborated that alternative assets often require more specialized operational knowledge, making collaboration and partnerships more important. “Investors new to sectors like telecommunications may choose joint venture opportunities with experienced partners who understand the nuances of that space,” he said.
Another key reason for the shift: demographics. As senior industry leaders retire, their successors are being challenged to rethink conventional strategies. “The next generation of leaders is now shaping portfolio strategies with more agility and openness to new asset classes,” the report noted.
### By the Numbers
Deloitte Financial Services supports its findings with compelling data:
– Alternative property categories have grown at a 10% compound annual growth rate (CAGR), increasing from $67 billion in 2000 to more than $600 billion in 2024.
– Real estate investment trusts (REITs) have played a significant role, raising their allocation to alternatives from 26% in 2000 to over 50% by 2024.
– Over the past decade, alternative assets outperformed traditional core properties, delivering annualized returns of 11.6% compared to 6.2%.
– By 2034, Deloitte projects that alternative property values will grow at a 15% CAGR, making up nearly 70% of all industry portfolio values; currently, they represent about 40%.
Coy added that a previous Deloitte prediction highlighted a major transition within the industry’s leadership, with 60% of current leaders expected to retire within the coming years. “That turnover coincides with the strategic imperative around asset selection seeking excess returns that could come from alternatives,” Coy noted.
He also pointed out that diversification remains a key advantage of this new asset mix. “Broadening both asset type and geographic exposure allows for more expansive portfolio construction based on risk-return objectives,” he said.
### Cautions and Caveats
Despite the optimism surrounding alternative real estate, Coy urges caution. “While these assets have outperformed in recent years, historical performance is no guarantee of future returns,” he warned. Many alternatives require in-depth, specialized knowledge to operate efficiently. “For example, a traditional office investor may not have the necessary expertise to navigate the operational intricacies of a regional manufactured housing portfolio.”
He also flagged the relative immaturity and limited liquidity of these markets, which can lead to greater volatility. With fewer players and more fragmented demand, alternatives are not always a guaranteed source of higher returns.
Finally, Coy emphasized the importance of maintaining a balanced approach. “Diversifying across both core and alternative asset classes is key,” he said. “This strategy helps manage risk while pursuing new opportunities.”
In summary, the CRE landscape is evolving, shaped by new leaders and investment approaches. While alternative assets offer exciting growth potential and diversification benefits, they also come with their own set of challenges. Navigating this new terrain will require both strategic vision and operational acuity.
