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Evolving megatrends turn alternative real estate sectors into rising stars
Megatrends have long influenced the commercial real estate market. Changes such as rising urbanization and shifting global economic power have created opportunities in traditional sectors like retail, housing and office space.
With slower economic growth expected in the post-coronavirus world, the focus shifts to real estate property types that can generate superior growth despite a weaker economic environment. These emerging sectors include alternative housing, health care and technology that are less tied to the state of the economy and more so to changing demographics.
Changing U.S. demographics benefit alternative housing
The aging of millennials and baby boomers will fuel demand for single-family rentals and senior housing.
Taking single-family rentals as an example, the aging millennial generation is starting to have children and desires the amenities that homes offer (3-plus bedrooms, a yard, privacy). This demographic (ages 35-44) is projected to grow at more than twice the rate of the general U.S. population over the next decade.
We also expect to see a large increase in demand for senior housing over the next few years, as the baby boomer generation ages. Over 65% of senior housing stock is 17 years or older, creating an opportunity for development.
Transforming U.S. health care system boosts health care real estate
Health care is the fastest-growing sector in the U.S. economy and accounts for nearly one-fifth of GDP, according to OECD Health Statistics 2019. Health care-centric real estate will continue to grow in importance during the coming decades, particularly in light of COVID-19. This includes subsectors such as medical office and life sciences centers.
Drug development is a key driver of life sciences demand. From a medical office perspective, we believe more care will be delivered outside of hospitals in more cost-effective settings, such as medical offices. In particular, we see opportunity in medical offices that offer higher acuity services that cannot be delivered via telemedicine.
A rise in the digital economy enhances technology real estate
Technology is another emerging alternative sector. Increasing data consumption is driving the need for more data centers, cell towers and their associated real estate components. The growth of global internet traffic, mobile-to-mobile connections and next-generation innovation – from artificial intelligence to the internet-of-things – should continue to propel the sector’s demand.
Data center markets have strong fundamentals, as companies of all sizes are taking advantage of colocation for connectivity and cloud services for inexpensive storage and processing power. Outsourcing data centers allows IT departments to buy the power and space needed today and add more as required, which becomes an operating expenditure rather than a capital expenditure.
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A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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