Reports: Alternative Sectors Lead the Way Amid Pandemic

JLL Capital Markets, Boston, San Francisco, San Diego
Courtesy of Chris Leipelt

By Catherine Sweeney

As commercial real estate faced a difficult year amid the COVID-19 pandemic in 2020, many alternative sectors saw increased activity. According to reports from JLL Capital Markets, various sectors including self-storage, life sciences, manufactured housing communities, medical offices and data center assets proved to be doing well during this time, making up for more than $47.9 million in transactions during 2020.

“We are seeing a big uptick with core investors educating themselves and moving capital into the alternatives space, as they evolve their portfolio allocation strategy,” Coleman Benedict, co-head of JLL’s Investment Sales Advisory Group. “At the same time, what is tempering their ability to make big strides is the fact that many of these sectors are still quite small in terms of investable stock, yet demonstrating significant rent growth and occupancy demand drivers as disruptive market forces play out.” 

According to JLL, each alternative sector showed varying levels of success during 2020 and each is expected to see continued growth in years to come.  

One such sector is self storage, which JLL anticipates will continue to see activity from institutional investors in 2021. In 2020 alone, self storage saw $4.36 billion in transaction volume nationally, which JLL predicts is likely due to individuals continuing to move and store items amid the pandemic. 

In 2020, 49.4 million square feet of self storage deliveries also were reported nationally, with 43.6 million square feet slated for delivery in 2021.

With a heightened demand for COVID-19 tests as well as vaccines, the life sciences sector also saw a lot of activity throughout 2020, JLL reported. In 2020 alone, the sector saw $10.41 billion in transactions, with Boston, San Francisco and San Diego leading the way. The three markets alone accounted for 70 percent of all venture capital investments for 2019. 

However, JLL does not anticipate activity in this sector to die down anytime soon, with reports showing a 16 percent growth – from more than $198 million to more than $230 million – in brand name pharmaceutical manufacturing through 2025. 

Manufactured housing communities also performed well in 2020, seeing an increased transaction volume of 32.2 percent- or approximately $3.2 billion in 2019 to $4.2 billion in 2020. 

However, JLL found supply for manufactured homes has been declining due to zoning restrictions, while an increased need for affordable housing could increase demand. Reports also anticipate institutional investment in manufactured homes to increase due to the sector’s success in 2020.

With many staying home throughout the COVID-19 pandemic, data centers also saw an increased demand in digital connectivity as well as e-commerce. In 2020, absorption in the U.S. reached 619.3 million megawatts. Total year to date returns in the U.S. totaled 17.2 percent, while traditional sectors, such as retail saw a  negative 28.3 percent year to date return. 

Looking ahead, JLL predicts the increased reliance on technology throughout the U.S. and a growth of cloud services will continue to drive demand for this sector.

Medical offices also performed well, keeping pace with the sector’s 20-year history of 92 percent occupancy nationally. In 2020, medical office sales totaled $13.2 billion. 

Medical assets are anticipated to continue performing well in the coming years, as advancements in technology and patient-centric care are driving outpatient care. Reports find aging populations also support a demand in healthcare services. 

Reports from JLL found that while demand in these sectors has increased due to the pandemic, demand in these areas will likely continue to trend upward. This is due to more established operators entering the space as well as institutional investors increasing allocations and causing increased liquidity throughout these sectors. These areas also offer investors the chance to diversify their portfolios  as well as provide the opportunity for new investors to enter the commercial real estate market, reports found. 

“Prior to the pandemic, investors were already expanding their focus and allocation to alternative assets, with the alternatives sectors’ share of overall transaction volume rising to nine percent between 2017 and 2019 versus six percent from 2005 to 2007,” said Matthew Lawton, JLL Capital Markets Co-Head of Investment Sales Advisory Group. 

“Underpinned by secular and cyclical drivers, many of the alternative asset classes are expected to generate among the highest risk-adjusted returns on a long-term basis of all property types.”

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