Heavyweight managers from other private markets are ready for their private real estate title fight, but another class of contenders is angling for a shot, too. They are typically nimbler firms that can bob and weave through tricky situations and deliver precise blows when openings arise. These welterweights are the owners and operators of real estate’s emerging alternative property types.

Part one of PERE’s two-part next contender cover story examined the rise of new asset manager entrants into real estate. For that, we spoke with established firms in other sectors now looking to make their mark on the property market. In this segment, PERE investigates the rise in stature of the sector specialists that have established a foothold via real estate’s emerging property types.

Bolstered by growing institutional appetite for properties outside the traditional four groups, firms with track records in sectors such as data centers, movie studios, single-family rentals and student housing have never been more attractive to institutional money. Unlike in years past, they are no longer relying on allocators to reach those pools of capital. Instead, they are accessing investors directly.

“We like investing with operational, single-asset specialists because naturally, with intense focus, they get deeper into their market,” Michael Zea, executive vice-president and operating partner for the Canadian pension investor QuadReal, tells PERE.

“Deeper expertise and strategic insights deliver stronger value creation from development to relationship management and service excellence.”

Alternative real estate types have become key to institutional real estate portfolios. In a PERE survey of investors, the two property types most likely to see increased allocations in 2022 were those related to healthcare and digital infrastructure, with 37 percent and 35 percent of respondents respectively favoring those spaces.

Underdog story

Matt Bear, founder of Las Vegas-based broker Bear Real Estate Advisors, has seen his business change dramatically during the pandemic.

Coming into 2020, Bear’s dealflow primarily consisted of industrial assets, followed by medical offices and select retail properties. Today, his clients – a mix of managers, family offices and wealthy individuals – have more diverse wish lists: data centers and student housing being key areas of focus.

“Three years ago, I don’t know that I was talking about any of it,” Bear tells PERE. “Two years, yes, and in the last 18 months, almost every day.”

In North America, alternative real estate transactions made up a record 19.4 percent of the overall market in early 2021, according to the accounting firm PwC. Two decades ago, such property types accounted for less than 3 percent of the market.

While alternative property types have been on the rise for years, the underdog story hit its crescendo during the pandemic. Overall, the segment grew by nearly 11 percent between 2019 and 2021. Conventional properties, meanwhile, declined by 16 percent during the same period.

“Alternatives: data centers, life sciences, self-storage, single-family home rentals. All of those play into a theme of re-envisioning the way we need and use space,” says Byron Carlock, head of PwC’s real estate practice. “Those alternatives as a percentage of the $47 trillion of real estate that we have is still a very small sub-set. But that percentage is one of the fastest-growing sub-sets of the market and that demand appears to be continuing and high.”

The singularly-focused owners and operators of these properties have gained the most from this swing in investor sentiment. Such groups have historically formed alliances with allocators, absorbing fund capital, putting it to work on the ground and collecting a fee along the way. But as pressure mounts to scale exposure to these niches, both operators and investors are finding it advantageous to work together directly.

“We’ve always emphasized that our clients have control over their investments, transparency into the operations and structure something [in which interests are] most aligned,” says Ben Maslan, managing director at consultancy RCLCO.

“Those have naturally gravitated toward separately managed accounts or programmatic joint ventures with sharpshooters in areas that we feel have strong demand drivers.”
Split decisions

Many specialists will face a fork in the road moment, choosing whether to double down on their chosen expertise or aggressively expand into capital formation. This is not an easy decision, as the expertise has usually drawn large institutions to them.

“People have different ideas, and even small differences in strategy differentiation can be something that’s compelling to convince someone to invest,” says Frank Sullivan, director of boutique placement agent JTP Capital.

Aware of this skepticism, some rising specialists are content to stick to their knitting and leave the capital-raising to established managers.

One such group is Los Angeles-based Hudson Pacific Properties, which owns more than one million square feet of production studios and roughly another one million of adjacent office space.

In 2020, Blackstone bought a 49 percent stake of the group’s Hollywood Media portfolio and last year the two groups announced a nearly $1 billion studio project in London.

Jeff Stotland, Hudson Pacific’s global head of studios and production services, says: “We don’t have plans to raise third-party capital. Between us and Blackstone, we feel pretty confident that we can get any deal we want to pursue.”

If specialists do opt to expand, they should be careful of extending beyond their reach. Track record is paramount, Sullivan says, noting that many investors will ask if the extra outperformance that is promised outweighs the incremental risk of a non-proven manager.

For some, adding a couple of punches to the repertoire has taken them from the undercard to the main event. New York-based single-family rental specialist Pretium Partners grew its assets under management from $14.6 billion at the end of 2019 to $31.8 billion through the end of Q3 2021.

Dana Hamilton, the firm’s senior managing director and head of real estate, says Pretium still considers itself an operator first. But its scale has enabled the firm to act like an asset manager. Last year, it partnered with Ares Management to privatize the listed rental home landlord Front Yard Residential for $2.4 billion. Pretium also bought 2,000 homes from Zillow’s ibuying platform and it sold a $1 billion portfolio of homes to Starwood Capital.

Pretium closed its third single-family rental fund on $1.5 billion last year, according to PERE data. It also launched two more funds, one targeting opportunistic returns, the other core-plus. After witnessing its performance in recent years, once-skeptical investors are eager to get exposure to the single-family rental space, Hamilton says.

“Seeing is believing in terms of the houses themselves, how the operations work and ultimately how the assets perform from a financial perspective,” she tells PERE. “So, the conversation shifted ‘from does this work?’ to ‘Okay, how do I access this?’ And now, oddly enough, people are asking, is it too late?”

Like Pretium, the contenders looking to follow in its footsteps all have expertise in operationally-intensive real estate. They were also early movers in their respective niches. Groups differ on the best way to achieve scale, with some favoring commingled funds and others strategic ventures. But they are all striving to be champions in their own right.