Non-Traditional Property Types: Part of a Diversified Real Estate Portfolio?

Abstract

Large institutional investors continue to direct increased amounts of capital toward commercial real estate, further fueling the growth and institutionalization of this asset class. Although historically these investments have been focused in five major property sectors (apartment, office, retail, industrial, and hotel), investors and managers are increasingly looking for opportunities in non-traditional sectors, such as self-storage, healthcare, student housing, manufactured housing, and other niche sectors. In this article, the authors analyze the opportunities and obstacles associated with these investments, with preliminary indications that adding non-traditional property sectors to a diversified portfolio can significantly boost the return–risk profile for investors. The optimal allocation to non-traditional property sectors, in both the public and private real estate sectors, may be well above its current share of the real estate investment trust and National Council of Real Estate Investment Fiduciaries indexes, respectively.