Alternative CRE Types to Attract More Funding: Nuveen

COVID-19's impact will alter portfolio composition over the next decade, according to the global investment manager's latest outlook.

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The target for alternatives in a typical real estate portfolio 10 years from now is expected to grow from around 12 percent to more than 50 percent, Nuveen forecasts in its new research study.

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As noted in the firm’s Outlook for Real Estate report, the commercial real estate market will continue to be shaped by the ramifications of COVID-19 in 2021 and for years to come. Nuveen, the global investment manager of TIAA, identified five themes that will take hold in the market as a result of the pandemic.

“These five themes will shape the investment landscape over the coming years, resulting in significant changes in the composition of real estate portfolios,” the firm notes in its report.

Nuveen identifies its first theme for the New Year as “awash with cash.” With governments around the world having infused their economies with cash in an effort to mitigate the financial damage of the pandemic, capital markets and asset values should get a lift from global monetary conditions, thereby bolstering commercial real estate investment. Investors are expected to focus their activity on the logistics sector, as well as alternatives and residential, leaving retail to continue on the downswing in 2021.

The second theme, “rethinking urban centers and suburban life,” centers on the assertion that the pandemic has inspired people to give more consideration to forsaking big cities in favor of accommodations in outlying suburbs. Nuveen points to U.S. migration data indicating that the pandemic has triggered an exodus of sorts as the population turns an eye toward greater space. As a result, the single-family and manufactured housing options more commonly found in the suburbs, as opposed to the apartment community-ladened city center, will grow in demand.

“Fast forward to the future” is third on the theme list, acknowledging that the pandemic expedited certain changes that were already in progress in the real estate industry, particularly those changes spurred by technology and demographics. E-commerce was on the rise  before coronavirus, but the pandemic’s rapid proliferation across the globe caused the adoption of e-commerce to mushroom, giving the industrial and logistics sector what will likely be a long-term boost. Demographics, along with infrastructure, will likely dictate the future of the office sector. “In Europe, cities which have shorter commute times and younger working populations are likely to return to the office sooner, which favors lifestyle cities and second-tier cities,” according to the report. “Large coastal U.S. cities are most at risk from home working, especially as people migrate to the Sun Belt.”

In its fourth theme, “identifying the winners and losers,” Nuveen expects a K-shaped recovery of the commercial real estate market, with resilient assets garnering the lion’s share of demand, leaving other sectors to be relegated to obsolescence. Nuveen wraps up its themes with “climate change,” noting that the issue, which has a notable implication for real estate in terms of the importance of sustainability, will experience a revival in 2021.

The new (normal) portfolio

Nuveen forecasts that exposure to traditional office product and retail will decrease as investors focus on alternative sectors, including health-care assets such as life sciences facilities and medical office buildings. And while multifamily remains relatively solid amid the pandemic—maintaining much of its strength that skyrocketed after the Great Recession—the sector will take a back seat to alternatives, including self-storage, manufactured housing and single-family rental units. And a new sector will materialize—the technology sector—with mounting investor interest in data centers and mobile towers.

With pandemic-induced change afoot in commercial real estate, portfolios will look quite different 10 years from now. “As these opportunities evolve over the coming decade, we anticipate the target for alternatives, within a typical real estate portfolio, growing from around 12 percent to more than 50 percent,” Nuveen forecasts in the report.

Read the full report by Nuveen.

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