Pundits, advisors, and industry voices mean various things when they talk about “alternative investments”. In today’s parlance, any private-market investment (i.e. an asset that is not publicly traded) can be referred to as an alternative investment. Alternatives are generally less liquid but, as a corollary, their valuations are not as susceptible to market swings. Still, as recently as 4 years ago, some voices in the investing community were referring to REITs (real estate investment trusts) as alternative real estate investments. As we have discussed before, publicly-traded REITs consistently exhibit greater correlation with public market returns than privately-held real estate assets, and cannot truly be considered an ‘alternative’.
This article takes a more focused look at alternative real estate investments: the prevailing definition, and the niche asset classes within private commercial real estate that institutional investors increasingly covet to attain further portfolio diversification.
Are REITs Alternative Real Estate Investments?
Short answer: no. Publicly-traded REITs have been around since the late 1960’s, and were conceived of as a means of providing individual, main street investors exposure to commercial real estate assets and the appreciation potential thereof.
Per Nareit, REITs are defined as follows: “REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance property. More than 80 million Americans invest in REIT stocks through their 401(k) and other investment funds.” So, while income is produced by underlying real estate assets, REITs operate like stocks in two key respects: they are liquid, and they are publicly traded. REITs do provide some degree of de-correlation from public equities markets, but they are still susceptible to the whims of collective perception in the same way as publicly-traded stocks.
By contrast, alternative assets are defined as illiquid, and traded only through private markets. This includes commercial real estate, private equity (including venture capital) or more novel investments like art, precious metals, or even rare sports cards. Historically such private markets have been opaque and inaccessible for most individual investors. Online platforms (such as EquityMultiple) have turned this paradigm on its head.
As such, the meaning of the term “alternative real estate investment” in common discourse has shifted over the past few decades. Whereas REITs were formerly the only way for most investors to participate in commercial real estate short of purchasing property, platforms like EquityMultiple now afford individual investors access to private-market commercial real estate – thereby squaring the definitions of “alternative asset” and “alternative real estate investment”.
Niche Real Estate Asset Classes
Individual investors are beginning to materially diversify into alternative assets like commercial real estate, closing the allocation gap between institutional investors and individuals (albeit at a modest pace, as of this writing).
As online platforms mature and increase their scale and reach, niche asset classes within the private real estate arena have also become more accessible for individuals. The four “core” commercial real estate asset classes were codified long ago: multifamily, office, retail, and industrial. While these core CRE asset classes remain the focus of industry chatter and research, a growing array of niche property types have begun commanding attention from institutional investors. Due to some combination of growing tenant demand, demographic trends, scant competition, and emerging technologies, these niche real estate asset classes present new opportunities for yield, and in some cases a recession-resistant investment thesis. In the context of the discussion above, we may refer to these property types as “alternative real estate investments” – opportunities for individual real estate investors to further diversify.
EquityMultiple has offered alternative real estate investments into several of the more established niche CRE asset classes. We have also provided educational material to delineate the ins and outs of each:
- Senior Living Facilities – Properties that provide both regular care and residency to a growing cohort of older Americans. Due to the essential nature and growing demand for tenancy, this is considered a potentially recession-resistant niche asset class by many institutional investors. Read more.
- Manufactured Home Communities – Communities of pre-built homes that are either owned by an operator/investor or owned by the tenant, with the land on which the unit sits leased to the tenant. With a growing need for alternative affordable housing solutions, and high barriers to entry constraining supply, the ‘MHC’ asset class is drawing increased interest from national institutional real estate investors. Read more.
- Car Wash Real Estate – Modernized car wash facilities have emerged as a viable institutional real estate asset class, with technological gains improving profitability potential. Analytics-driven location selection also allows for investors to incorporate attractive downside scenarios into business plans. Read more.
In addition to these niche property types, real estate investors may also refer to data storage centers, student housing, or co-living when discussing the universe of alternative real estate investments – all investment types that EquityMultiple has offered. To learn more about EquityMultiple investments in niche asset classes and beyond, please schedule a call with our Investor Relations team, or sign up for a free account to view current and past investments.
*To help ensure you select an investment suited to your investment objectives, liquidity needs, and risk tolerance, we require that all prospective investors read the Investor Packet and other offering materials for any investment you are considering and carefully review the potential risks detailed therein prior to investing. All investments involve risk, including the potential for loss of capital (including invested principal). Such risks include, among other things, the illiquid nature of the investment, risks relating to the management of the projects, risks relating to any renovation or construction work to be performed at the property, and real estate market risks generally. Investors must be able to bear such risks. Positive returns, dividends, and distributions are not guaranteed nor insured by EquityMultiple, the FDIC, or any other agency, Governmental or otherwise. Forward-looking statements, hypothetical information or calculations, analysis reports, financial estimates, and returns objectives are inherently uncertain and involve risk and past performance is no guarantee of future results. Investors should not base their investment decision solely upon such information. Investors should either possess the necessary financial knowledge and experience to properly evaluate a potential investment or consult with an investment professional prior to investing. Repayment of the loan and interest is dependent upon a number of factors including but not limited to the ability of the Borrower to obtain subsequent financing, overall business results, and real estate market conditions. Investment performance may be negatively affected by poor business results, bad market conditions, and unforeseen events. For a more fulsome list of risk factors, please review the Investor Packet. For a more fulsome list of risk factors, please review the Risk Factors section of the Investor Packet.
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