With everyone seemingly on the hunt for bargains in the CRE space, we felt it timely to outline those property types we think investors may want to focus on in 2024.
Dislocation in the commercial real estate space has created some great opportunities. However, to divine these and what they may translate into in terms of long-term megatrends investors must try to understand how and why people use space.
First and foremost, people (renters) use space to accommodate those life events which occur irrespective of the economic environment. These are the things which happen to all people at some point in their lives. Things like family formation, death, divorce, dislocation and downsizing.
These are not trend driven events. Therefore, they have historically enjoyed a degree of constancy and consistency that transcended time and generations. In our opinion, this is the main reason self-storage has outperformed virtually every other CRE sector during economic upswings and downturns. It is the most change driven CRE type available and increasingly rapid change is the hallmark of our time.
Along these same lines, our population is aging. This is creating increasing demand for both senior living and medical office or healthcare assets.
In this way, America is little different than most other developed nations, which without immigration are not replacing themselves. However, we feel the need for more senior living space will be particularly acute here. This is due to the highly atomized nature of American life and the accelerating breakdown of the nuclear family.
America has always been a highly mobile society. People think nothing of picking up sticks and moving to the next town or state in pursuit of opportunity and a better life.
This mobility has helped make us the most materially successful culture on earth. However, it comes at the price of family stability. Grandparents, parents and children can be separated by an entire continent. Therefore, the ‘old world’ model of generational care and support for the elderly doesn’t work well here. Truth be told, few young people I know are willing to put their busy lives on hold to care for mom and dad.
Therefore, the default position is senior living. If there is not nuclear family nearby to take them in, seniors will create an extended family via: independent living, assisted living and memory care.
Have no doubt, the new relationships created here will go a long way toward replacing those lost to distant family members living in faraway places.
The strength of these new relationships have the fortunate effect for landlords of creating “sticky” tenants. The latter being strongly disinclined to leave their new ‘family’ or extended support group. This creates both continuity and predictability from a rent standpoint.
The healthcare sector or medical office buildings (MOBs) should also benefit from the aging U.S. population and its ability to deliver healthcare services outside a traditional hospital setting.
As the population of Americans 65 and older continues to grow, demand for these services in more convenient locations will grow apace. The fragmented nature of this industry should also make it attractive to retail investors in 1031 exchange. With less institutional competition for these assets, acquisition cap rates may be more attractive than other core asset types as well.
Due to their non-cyclical nature, all three of these asset types have the potential to provide investors with attractive long term returns.
They are all unique. However, they all hinge on common demographic, life-event demand drivers. In uncertain times the historical constancy of these events may make them all good defensive investments.