Secondary Asset Classes to Watch in 2022

Credit: Phoenix Business Journal

As investors continue to hunt for yield opportunities in a red-hot commercial real estate market, secondary asset classes beyond the mainstays of multifamily, office, retail and industrial are seeing increased attention. Following is a brief look at some of the formerly peripheral areas that have experienced heavier traffic in 2021 and are expected to see even more in 2022.

Cold Storage

Two factors combined to fuel expanded investment and development interest in cold storage. The pandemic generated massive activity in food and cold commodities delivery, and major portions of the cold storage industrial sector are obsolete in terms of facilities and equipment.

Though more expensive to develop than standard warehouse and logistics facilities, the market is expected to increase 14% each year through 2027, reaching an estimated value of $18.6B, according to data from Emergen Research.

Self-storage

Self-storage was already seeing an expansion before the pandemic, fueled by the Age of the Renter as young adults stayed in apartments longer, even as their incomes rose to the point they could start affording single-family housing, and older adults began downsizing from traditional homes into smaller, often rented, housing.

As with most other sectors, the pandemic made a fundamental shift. Colleges enacted remote learning, sending many students back to their parents and causing them to move their furnishings and accumulated items into storage. Workers who transitioned from offices to work-from- home needed to clear space. Household formations also increased, and redundant or unnecessary items got moved into storage.

Q3 data from Marcus & Millichap shows a national vacancy rate of 5.5%, down from 10.1% before the pandemic. Some analysts had feared overbuilding before the pandemic, but 50MSF came online in 2021, with another 40MSF expected in 2022. Construction has had challenges because of material shortages, particularly in terms of the steel needed for unit doors.

The market absorbed 100MSF in 2020 and 70MSF in 2021.

Medical Office

Medical office slowed in 2020 but rebounded in 2021 as patients resumed elective surgeries and other general but non-crisis health activities.

Sales dropped 12.7% in 2020, according to CBRE, but rebounded quickly. Medical office Q3 vacancies were 9.6%, indicating a healthy long-term investment option, particularly as Baby Boomers ages continue to increase.

Data Centers

Once again, the pandemic lit a fire under the sector. Connectivity demand soared, and data center absorption hit 273.6MW across 13 markets, according to data from JLL.

Construction increased from 612MW at year-end 2020 to 681MW in the first half of 2021.

Data centers have proven challenging on the development front, however, because of their heavy capital demands and resource-intensive nature, particularly in terms of water use. While data centers are still being built, there is no market for speculative construction because of the high degree of specialization. (Source)

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