Where Are Capital Allocations Going? 

January 16, 2024 • By John Salustri

“Stodgy.”

That is how Beth Mattison-Tieg describes under-performing assets in her recent article for the Urban Land Institute, “Investors Fueling Growth in Alternative Property Sectors.” The article piggybacks on the release of ULI’s 2024 Emerging Trends in Real Estate and its analysis of a so-called “portfolio pivot,” toward alternative investments. 

Of course, there is really no surprise at this point in the post-pandemic environment that investors are redefining their core assets, shifting away from problematic property types—read: office and enclosed retail—in favor of greener pastures.

“Traditionally, ‘core’ has been defined by the four main food groups [office, retail, industrial and multifamily],” stated one asset manager in the report.  Much of what we might call the new core, he says, are actually extensions of traditional frontrunners. In industrial, for example (which continues to fare well, despite its post-pandemic cooling), cold and self-storage are now making strong showings, as are data centers. Ditto student, workforce and seniors housing as a subset of multifamily.

It is important to note here that, despite the woes that have befallen the office sector, a redefined core does not necessarily rule out the sector as a whole. As one asset manager stated, “I think office gets rethought in terms of what’s core, perhaps less by geography like urban or CBD [central business district] and more by age and stage or by capital intensity.”

New Avenues, New Challenges

Redefining an investment strategy is only half the battle, however. Unleashing the capital from a retail or office asset in order to fund that next move is the next challenge. For one fund manager, the answer is buying portfolios.

“You don’t buy two truck stops and then another two and then another two,” he says. “You buy 100 truck stops, or you buy a 20 percent interest in 400.”

Naturally, property management skills focused on a previously untapped sector come in mighty handy. “Owners also must be able to manage the property,” says Emerging Trends, “which typically is more operational and thus requires more specialized knowledge than more conventional product types.”

Entering new investment waters also demands a fresh look at the issues of sustainability. “Once you figure out what the composition of that portfolio looks like,” one fund manager stated, “the number-two issue is going to be some combination of decarbonization of it and at the same time adapting that portfolio to climate change.”

This assumes that the former owner or owners were not on top of their sustainability game. Step up, he said, your “energy conservation efforts and a whole series of activities to decarbonize and reduce the carbon footprint of every aspect of real estate: construction, the management, the ownership of it.”

And, of course, there is the reporting to other stakeholders as well as to regulators and trade associations, a perennial step in the investment process, no matter the climate. He includes NCREIF and the Pension Real Estate Association (PREA) in that number.

You can add to these the evaluation of the upfront criteria that always govern—or should always govern—the decision to diversify. According to the report, these include property sector allocation; target asset markets; desired tenancy; and the “preferred operational, physical and site attributes of each asset type.”

So in many respects, venturing into new areas of alternative investments follows the patterns of your traditional “core” strategies. But there are enough new criteria that demand, more than ever, thorough due diligence upfront and throughout the process.

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