Alternative real estate firms offer the right entry into management today

Firms like Harrison Street, which was acquired by Colliers this week, pursue strategies with arguably stronger growth trajectories than those of most other M&A targets in private equity real estate right now.

This week, commercial real estate services firm Colliers International announced its entry into the investment management space with the acquisition of a majority interest in Chicago’s Harrison Street Real Estate Capital.

Harrison Street may not have seemed an obvious choice for a firm seeking to establish itself in the investment management business. More predictable for a company new to the space would be to ensure it was established in the four traditional property types of office, industrial, retail and multifamily before branching out into the more niche sectors Harrison Street is best known for.

But it is because of, and not despite, Harrison Street’s focus on alternative real estate strategies – including student and senior housing, medical office and self-storage – that makes the firm attractive to a buyer that wants the best chance at capturing growth at this point in the cycle.

Niche property types, after all, are generally considered an area of expansion in global real estate investment. While allocations to alternative real estate totaled $14.8 billion, or 3.6 percent of global commercial real estate volume in 2010, that number nearly tripled to $52.1 billion, or 6.2 percent of global investment, in 2016, according to a May 2017 alternatives real estate report from JLL. Increasing demand, driven primarily by institutional investors, is expected to continue, in part because of the strong relative performance of alternatives compared with traditional property types, the report said.

“As the weight of capital looking to access commercial real estate has increased, yields have pushed down to cyclical lows,” JLL researchers David Green-Gordon and Pranav Sethuraman wrote in the report. “In this environment, real estate alternatives allow investors to obtain higher yields and diversify their portfolios further, offering access to the market at a relative discount to traditional asset classes such as offices or retail.”

Indeed, in the firm’s 2018 UK Alternatives Investor Predictions Survey, 71 percent of respondents expected total returns for alternative real estate sectors to be higher than those for commercial property.

Harrison Street therefore appears to have a stronger growth trajectory than other private equity real estate firms focused on the four main food groups, at this time. This is the case both inside the US – where demographic trends support niche strategies and large institutional investors like GIC and CPPIB have been eager buyers of the firm’s assets – as well as outside of the country, where these sectors are still emerging. Harrison Street’s 2015 opening of a London office and its debut continental Europe deal last year are both indicative of the firm’s international expansion.

Notably, the firm’s expected growth has been reflected in the deal’s price tag, particularly in its structuring: in the form of the $100 million that Colliers has agreed to pay in 2022 if Harrison Street achieves “certain accelerated performance targets.”

Not that the outlook for niche property types is entirely rosy, as US and UK political changes may dampen demand for student housing if the countries become less attractive to international students. Oversupply of senior housing in some US markets is also a potential concern. While some speculate a softening in these sectors could lead Colliers and Harrison Street to eventually broaden the platform into traditional property types, we do not believe that will necessarily be the catalyst. Colliers, in its quest to compete with CBRE, JLL and other the property services firms active in investment management, will likely expand its offerings in that regard when viable opportunities to do so present themselves.

In the meantime, Colliers will look to capitalize on Harrison Street’s niche focuses, which have been a key differentiator since its founding in 2005. In any event, if the institutionalization of multifamily is anything to go by, what is considered alternative today may become mainstream tomorrow.

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