Real estate investment enters a new era

Alternative sub-sectors offer unique demand drivers and the potential to outperform core real estate sectors.

The last few years have brought a period of unprecedented change which has reshaped the real estate investment landscape. As a result, alternative sectors have emerged that tie into global megatrends and can provide long-term opportunities.

Digitalization and demographic change in advanced economies are two trends that are driving large shifts in real estate. As a result of the increasingly ubiquitous use of artificial intelligence, data centers are experiencing unprecedented demand. However, they are just one part of the alternative real estate story and emerging alternatives such as senior living and medical-associated real estate are lesser-known opportunities.

Gaining investor interest: Senior living and the medical outpatient sector

To future-proof real estate portfolios, it is essential to understand how an aging population will impact demand for buildings and services.

Globally, life expectancy is increasing and creating a growing population of those aged 65 and over. Meanwhile, working age populations are stalling in some countries, and even decreasing due to falling fertility rates.

The burgeoning global senior population is creating a significant opportunity for real estate investors focused on alternatives, such as care facilities. As demand for these facilities outstrips supply, the sector presents a compelling investment opportunity.

In the U.K., for example, Savills estimates an annual need for 14,400 new care home beds over the next decade. However, the industry has struggled to keep pace, with only 5,900 beds under construction in late 2023. Similar demand patterns can be seen across other advanced economies. By 2065, seniors in Japan are expected to comprise 25% of the population, necessitating a significant increase in care home capacity. An undersupply of specialized care equipment, such as beds, is an early indicator of the growing demand for care facilities in the years ahead. To keep up with growing global demand, significant private sector investment will be needed.

Healthcare and medical real estate

Medical outpatient buildings have historically provided higher income returns and much lower total return volatility than the average real estate sector.¹ The rising senior population in advanced economies presents favorable secular tailwinds and opportunity for strong medical outpatient demand. While medical offices have typically been classified as a sub-sector of the office sector; unlike traditional office buildings, they are far less affected by remote working as most visits continue to be necessary in person.

However, senior demand doesn’t tell the whole story when it comes to the sector. The healthcare industry is also undergoing a seismic shift, as patients increasingly opt for outpatient care over traditional hospital stays. Driven by factors such as convenience and cost-effectiveness, this trend is particularly pronounced in the U.S. Since 1995, hospital admissions have declined by 21%, while outpatient visits have soared 52%².

This creates a significant opportunity for investors and developers to capitalize on the growing demand for modern outpatient medical facilities. These opportunities are not confined to the U.S. and will, in our opinion, grow in importance over the coming decades as the senior population continues to grow and live longer.

Struggling post pandemic: Traditional office and retail sectors

In the post-pandemic era, office and retail real estate sectors must adapt to a new paradigm stemming from the rise of e-commerce and hybrid working. This, coupled with a potential fall in demand due to a stagnating and declining working age population does not present an attractive proposition for office and retail real estate.

However, there could be green shoots in the sector and while it is still too early to tell, refurbishment of underoccupied office buildings could become a lasting trend. Underused buildings could be revamped to support inpatient and outpatient senior care, for example. In the U.K. there are already signs of the office refurbishment trend. 

Retail shift underway

Retail is another segment undergoing painful disruption. Foot traffic in major cities and urban centers still remain below pandemic levels although there is considerable regional dispersion and large urban and tourist centers are expected to fully recover.

A shift in retail strategy is underway in the U.S., with many retailers focusing their expansion efforts beyond traditional urban cores. This trend is reshaping the demand for retail assets, with suburban areas emerging as key growth markets.

Grocery stores have become increasingly important as anchor tenants in suburban developments, while the potential for mixed-use projects, including multifamily housing, is also on the rise. For example, grocery-anchored neighborhood shopping centers in Australia are particularly attractive investments. Their high initial yields, coupled with the Australian consumer's non-discretionary spending, contribute to their strong performance.

With major urban centers pricing out millennials and middle-income renters, investment in the multifamily sector beyond the traditional urban cores could be an opportunity that targets multifamily assets that are well positioned for demographic and structural growth.

A selective opportunity

The outlook for real estate is looking up, but investors must understand the demographic and structural changes will not impact all sectors of real estate equally.

As interest rates continue the downward trend and the real estate market recovers from its bottom, the time could be ripe for investment opportunities, but investors will need to be savvy.