Rising Competition Causes Investors to Expand into New Property Segments

As an investor, do you want to attract transients to your property? You do if the property is a marina—in that world, “transient” is the term for lessors of boat docks that are not owned by “slip holders.”  As institutional investors look for higher-yield real estate opportunities, niche property types like marinas are increasingly attractive investment targets—and the onus is on investment managers to understand the lingo and other nuances unique to each property segment.

“The definition of an institutional property type is expanding before our eyes,” according to Heitman’s head of global research Mary Ludgin, speaking at a recent NAREIM conference.   Investors are moving beyond the four “core” property types—office, industrial, retail and multifamily residential—to consider opportunities in self-storage, seniors housing, student housing, resorts and other product segments that weren’t on many radar screens a few years ago.

Perhaps the most notable example of this trend is the market for medical office buildings (MOBs), where U.S. investment sales reached $6.23 billion in 2013 and may top $6.5 billion this year, based on the pace of new investment capital pursuing the segment.  Investment criteria are different for MOBs than for other office buildings—MOBs need to be near or on a hospital campus, they need high electrical loads and backup generators for  medical equipment, and there must be enough parking to handle a high volume of patient traffic. Investment managers must decide whether to cultivate the expertise and resources to compete for these properties, or to accept that institutions will turn to other managers for those investments.

Property segmentation isn’t a new phenomenon. Public REITs have focused on seniors housing and self-storage, among other types, for decades, and institutions have been known to buy a range of property types. Those with long memories may recall when hotels were considered core investments and apartment buildings were not. And new segments have emerged in the retail, industrial and residential property markets over the years.

But as institutional investors increase their allocations to real estate, competition for good properties with strong yields is spilling over from core property types into niche segments at a dramatic pace. It remains to be seen whether this is a permanent trend or just the ebb and flow of market demand that is lifting all boats—a marina term that needs no explanation.