Alternative Property Types: Unlocking Value in Less Saturated Segments
INTRODUCTION
In recent years, alternative property types have gained traction as a dynamic segment of the real estate market and now play a significant role in institutional portfolio allocations. These non-traditional assets, ranging from student housing and data centers to medical facilities, are becoming increasingly significant due to their relatively strong performance and differentiated demand drivers, even during volatile economic conditions. Compared to the handful of “major” property types, Investors and Consultants are beginning to accept off-benchmark risk to capitalize on institutionalizing newer segments of the market. Alliance Global Advisors would like to thank Christopher Merrill and Jenna Sheehan of Harrison Street, Mit Shah of Noble Investment Group and Terrell Gates of Virtus Real Estate Capital for providing their valuable insights to this blog.
ALTERNATIVE PROPERTY TYPES
Alternative property types are defined as assets and subtypes that fall outside the traditional categories of office, retail, multifamily and industrial properties. Unlike traditional real estate investments, alternative property types are often driven by specific market trends and evolving consumer needs, like the rise of e-commerce, remote work and demographic shifts. These property types can complement existing exposures and offer Investors unique opportunities to diversify their portfolios. Since Investors increasingly recognize these property types for their favorable fundamentals, growth potential and role in the broader real estate landscape, the demand for these assets continues to grow.
Over the last five years, Alliance witnessed the evolution of alternative property types evolve as shifts in consumer behavior, technological advancements and the broader economic environment drove demand. In 2023 and 2024, Investors refrained from allocating significant amounts of capital to traditional property types due to rising interest rates, pricing and valuation concerns, setting the stage for a new era of growth and innovation in the alternative property types. The market expects fresh opportunities for diversification and long-term value creation in sectors that have just begun attracting institutional Investors’ attention. Christopher Merrill, Harrison Street’s co-founder, chairman and CEO, mentions, “Traditional real estate sectors tend to correlate more closely with the broader economic cycle with demand driven by GDP and job growth. In contrast, the demand for alternative sectors is driven primarily by life events, and in many cases, needs-based demand.” Unlike many new entrants in the space who haven’t yet managed institutional capital, the alternative segments aren’t a new phenomenon to Harrison Street, who has been investing in the space since its inception in 2005. By understanding the key developments in the market and the new property types that are appearing in the alternative investment space, we can begin to understand the increased institutional interest in these assets.
NCREIF EXPANDED NPI AND ODCE INDEX
The National Council of Real Estate Investment Fiduciaries (NCREIF) introduced the Expanded NPI in the first quarter of 2024 to expand its index that previously focused on traditional property sectors. The evolving nature of the real estate market has driven the expansion of this index to include senior housing and self-storage as their own categories alongside others. Jenna Sheehan, Senior Managing Director at Harrison Street, commented on this expansion, “In recent years, and perhaps in part due to the instability in certain traditional sectors, we have seen a broader shift in how the industry defines Core investments. This evolution is underscored by the NCREIF’s decision to expand its flagship indices.” The NFI-ODCE Index has also begun to evolve to encapsulate the changing real estate universe, with new index requirements. Chart 1 below shows the most recent updates to the NPI and NFI-ODCE, which are significant changes since a majority of U.S. institutional investors compare performance to a NCREIF benchmark. Charts 2 and 3 show how limited the exposure is in the “other” category, further exemplifying the importance of these changes to the NPI and the NFI-ODCE.
Chart 1: NPI and NFI-ODCE Updates
Self-storage is not included in the NFI-ODCE property types and is therefore included in the ‘other’ category which includes up to 25% of the fund’s portfolio
Chart 2: NFI-ODCE Average Property Count by Property Type as of 9/30/24
Chart 3: Expanded NPI Property Count by Property Type as of 9/30/24
ORIGINAL AND EMERGING ALTERNATE PROPERTY TYPES
Alternative property types have long been an essential yet underappreciated segment of the real estate market. Hotels were among the first property types to redefine this category and enter institutional portfolios, showcasing strong cash yields, adaptability and resilience through economic cycles. Mitesh Shah, CEO of Noble Investment Group (founded in 1993), highlights their unique value: “Incremental revenue in hospitality flows directly to the bottom line at a higher rate compared to traditional property sectors, creating an outsized impact on profit margins.” However, Shah also emphasizes the need for experienced operators overseeing the execution within alternative segments: “Higher operating leverage brings a need for exceptional operational acumen. The key differentiator is a firm’s ability to control costs, maximize performance and adapt to shifting market conditions.” Even during major demand shocks, such as the COVID-19 pandemic, hotels rebounded swiftly, further solidifying their status as a cornerstone of alternative investments. As travel demand remains robust and long-term stays continue to rise, hotels have paved the way for diversification into new property types. For hospitality investors, benchmarking is especially challenging because the small exposures in the major benchmarks such as NCREIF’s NFI-ODCE and NPI are not representative of the type of hospitality asset a vertically-integrated firm like Noble may acquire. This challenge is not unique to hospitality, and applies to any “less institutionalized” segment of the market. However, therein lies the opportunity.
Emerging property types like Co-Warehousing and Industrial Outdoor Storage (IOS) are expanding the alternative real estate landscape. Co-Warehousing caters to small businesses and e-commerce brands seeking affordable, flexible storage solutions, as well as larger companies requiring seasonal capacity. Competitive lease terms and cost-efficient models attract diverse tenants, though the short-term nature of many leases demands ongoing efforts to attract new customers.
Meanwhile, IOS offers strong risk-adjusted returns due to consistent demand for equipment, vehicles and material storage, paired with limited new supply caused by zoning barriers. Despite challenges such as smaller deal sizes and limited data tracking, institutional interest in IOS is surging. This is reflected by Alterra Property Group’s latest IOS-focused fund, which held an oversubscribed final close in May 2024, raising $925 million, easily outpacing its original target of $750 million and $850 million hard cap, and nearly double the size of the predecessor fund.
Together, these original and emerging property types highlight the evolving landscape of alternative real estate, offering Investors innovative paths for growth and diversification.
IN CLOSING
Alternative property types have become increasingly visible and accessible as institutional Investors and managers look to expand and diversify their portfolios. As this landscape continues to evolve, alternative property types will continue to grow and take on a larger role in the commercial real estate market. The evolution of property types like industrial outdoor storage and long-term rentals highlights the diversification of this market opportunity, and the expansion of the NCREIF NPI index further validates the significance of these property types. The rise of alternative properties offers a promising chance for future growth. In addition to strong performance indicators and risk-adjusted returns, these assets provide the opportunity to get ahead of trends that are shaping the market. Building diversified portfolios allows Investors and managers to be well-positioned to capitalize on ever-changing dynamics in the global economy.
To provide further insights into this evolving space, we’ve included a Q&A with industry experts, offering their perspectives on the future of alternative property types.
EXPERT Q&A
Alliance interviewed Mit Shah, CEO of Noble Investment Group and Terrell Gates, CEO of Virtus Real Estate Group, who have been long-term investors in Alternative Property Types, to gather insights about how these property types have developed and where they are going.
Q: How do you think the unique operating model has shaped investor interest in alternative real estate sectors as a whole?
Mit Shah, CEO of Noble Investment Group: Reflecting on Noble’s 30-year history as a leader in the hospitality sector, it’s worth noting that hospitality was one of the original “alternative” or “niche” property types within real estate. Its distinct operating model—defined by higher operating leverage and consistent cash flows—has driven greater institutional interest in hospitality and in turn influenced emerging alternative real estate sectors.
What makes hospitality particularly compelling—and increasingly relevant for institutional investors—is its ability to unlock significant value during periods of both growth and disruption. Incremental revenue in hospitality flows directly to the bottom line at a higher rate compared to traditional property sectors, creating an outsized impact on profit margins. This phenomenon underscores the power of the operating model.
However, higher operating leverage also brings a need for exceptional operational acumen. The key differentiator is a firm’s ability to drive pricing and revenue, control costs, maximize performance and adapt to shifting market conditions. Over the past three decades, Noble has honed this expertise, building an investment approach rooted in deep operational insights, data-driven decision-making and a relentless focus on value creation.
Q: In what ways have hotels proven their resilience compared to traditional asset classes, particularly during periods of economic volatility or shifts in travel demand?
Shah: The type of hotels Noble is focused on have consistently demonstrated their resilience and adaptability, outperforming traditional real estate asset classes during economic volatility and shifting travel patterns. What sets hospitality apart is its ability to rapidly align operations, manage costs and capitalize on demand fluctuations—advantages that are especially pronounced during periods of disruption.
Unlike other segments within alternative real estate, hospitality benefits from a well-documented history of cycle-tested realized returns. Even in the face of significant demand shocks, such as the COVID-19 pandemic, hotels proved their durability by rebounding faster than traditional property types. The reason is twofold: first, hospitality valuations are driven by daily cash flows and real-time demand data, offering greater transparency and visibility into asset performance. Second, this visibility enables operators to swiftly address inefficiencies, adapt strategies to stabilize performance and position assets for growth as market conditions improve.
Post-pandemic trends have further underscored the sector’s resilience and ability to capture evolving demand patterns. Two positive structural shifts include higher occupancies driven by longer stays—particularly on shoulder nights like Thursdays and Sundays—and the increasing desire among businesses and individuals to take advantage of flexible working arrangements and in-person interactions. These tailwinds have supported sustained demand across Noble’s portfolio of select-service and extended-stay properties.
Finally, current market conditions have created a unique opportunity for experienced operators. The slowdown in new supply, a direct result of increased rates and tighter debt capital markets, has enhanced pricing power and occupancy gains for existing properties. At the same time, the combination of ownership scenarios and heightened demand has set the stage for what we believe to be a generational buying opportunity.
Q: As the hospitality industry evolves with trends like long-term stays and flexible accommodations, what do you see as the most compelling opportunities for hotel investments in the current market?
Shah: Hospitality continues to offer some of the most compelling opportunities within real estate today, driven by its ability to valuations rapidly, capitalize on market dislocation and adapt to evolving trends like long-term stays and flexible accommodations.
A key dynamic in today’s market is the speed at which hotel valuations readjusted following the COVID-19 pandemic. Unlike other real estate sectors, the hospitality industry benefits from daily cash flows and real-time demand visibility, which allow values to adjust rapidly and reflect evolving market conditions. Combined with sustained travel demand, this has led to meaningful improvement in valuations and a positive outlook for growth.
Meanwhile, dislocation continues to create opportunities. Many assets acquired by generalist allocators or “Mom-and-Pop” owners without operational expertise have underperformed, creating opportunities for experienced operators to reposition and unlock value. Additionally, public companies are divesting non-core properties, often in need of capital improvements, presenting attractive acquisition opportunities for firms like Noble.
Long-term stay and flexible accommodations increase the appeal of select-service and extended-stay properties, aligning with evolving traveler behavior and delivering strong margins with operational efficiency. Noble’s expertise and long-standing brand relationships position us to capitalize on these trends and drive meaningful value for investors.
Q: How would you define the key advantages of investing in alternative property types versus traditional real estate sectors?
Terrell Gates, CEO of Virtus Real Estate Capital: Alternative property types generally refer to anything other than Basic Food Group property types (office, retail, industrial, traditional multifamily and some also include hospitality). A subset of Alternative property types that Virtus focuses on is what we refer to as “cycle-resilient” or “needs-based” property sectors. We generally focus on four primary sectors today: 1. Healthcare (MOB, senior living, specialty healthcare and life sciences); 2. Education (early education and student housing); 3. Storage (primarily self-storage and secondarily cold storage); and 4. Middle-Income Workforce Housing (aka-Key Worker Housing for healthcare workers, teachers, first responders and other public sector workers).
The benefit of these sectors compared to traditional sectors is that they provide more durable income streams and less valuation volatility. As such, an investor can experience lower risk, especially throughout challenging capital market and economic cycles, and during black swan events. This can ultimately lead to asymmetric performance compared to traditional property sector investment strategies.
The biggest challenge is that cycle-resilient sectors have more idiosyncratic factors, and certain categories have more operational intensity than certain traditional sectors.
By investing in cycle-resilient sectors, an investor can essentially insulate themselves from macro exogenous uncontrollable risks, but it’s important they’re all over mitigating the controllable risks, such as market/sub-market selection, property selection, physical plant, operations, management, marketing and especially the people executing the property level business plans.
Q: Why do you believe alternative property types have become a popular sector?
Gates: Lower risk without sacrificing higher returns, more predictable outcomes and the recent recognition of the long-term headwinds for certain traditional sectors have led investors to increase their interest in cycle-resilient sectors, as well as other alternative sectors. Alternative sectors are still such a small part of most private real estate portfolios despite offering superior risk-adjusted returns if you know how to invest in these sectors. For example, ODCE still only has only ~9% of NAV in alternative sectors, and I believe across institutional private real estate investments, it’s only ~11% of total exposure. Yet, 49% of the NAREIT index is comprised of alternative sectors.
Q: Are there specific market conditions that are accelerating institutional interest in these alternative property sectors?
Gates: The recognition of greater bifurcation in performance is one of the key drivers. That is to say, the U.S. CRE market has clear winners and losers. You can simultaneously have very healthy sectors and very unhealthy property sectors. Sector and market selection have become far more important in influencing performance in U.S. real estate portfolios.
As such, the extreme volatility brought on by COVID-19, and then the impacts of the Great Tightening have pushed investors to prioritize alternatives more than traditional sectors, especially cycle-resilient sectors, in order to protect themselves from future black swan events and challenging economic conditions.
Q: Are there currently any off-the-radar alternative property types that have the potential to emerge as strong contenders for institutional portfolios?
Gates: Certainly not off the radar, but Data Centers are by far the hottest alternative sector currently. We first started investigating Data Centers in 2006, but quickly concluded they didn’t meet our cycle-resilient criteria. However, it’s had a great run through the years due to the emergence of e-commerce and AI more recently.
There are a number of alternative housing categories that will continue gaining popularity in institutional portfolios (although we’ve been investing in alternative housing sectors, the most resilient categories, for many years), such as Student Housing and Active Adult.
Although we’ve been investing in Early Education for nearly 8 years, it’s still very unrepresented in institutional portfolios (difficult to scale, which makes it challenging to be in institutional portfolios) and is probably considered by most LPs as the most novel sector we invest in today.
ABOUT ALLIANCE GLOBAL ADVISORS:
Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with over $870 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.
Disclaimer: This blog was originally published in January 2025 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.