Next-Generation Leaders May Accelerate Real Estate Investment in Alternative Properties – Commercial Observer
US commercial real estate investing opportunities favored core property sectors for decades. But recent market forces and new leadership could knock down long-established pillars.
Traditionally, commercial real estate owners and investors built portfolios of properties by selecting from a wide array of high-quality assets defined within four core property types: office, industrial, retail and apartment. A diversified portfolio of these core assets provided consistent income from rental growth, sustained value appreciation and minimal variability in performance.1 This approach was generally enough to meet investor objectives and even outperform other financial assets like equities or treasuries, when adjusting for risk.2
Not anymore. The emergence of alternative property sectors has begun to topple long-established pillars for CRE portfolio construction. At the same time, more of the industry’s top decision-makers are approaching retirement, challenging the next generation of leaders to adapt conventional strategies.
Over the next decade, fundamental shifts in real estate investment could occur from the emergence of niche property types, coupled with next-generation leaders accelerating nontraditional portfolio construction decisions. The Deloitte Center for Financial Services predicts that by 2034, the value of alternative properties will grow at a 15 percent compound annual growth rate (CAGR) to account for nearly 70 percent of industry portfolio values — an increase from just over 40 percent today (figure 1) (see “About this prediction”).
The shift toward alternatives is already underway
Alternative property types — data centers, cell towers, life sciences laboratories, health care buildings, self-storage facilities, single-family rentals, senior housing and student housing, among others — are pushing some real estate leaders to realign their long-held portfolio construction proclivities. Alternatives have grown at a 10 percent CAGR, from $67 billion in 2000 to more than $600 billion in 2024.3 Alternatives have also outperformed traditional properties over the past decade, achieving 11.6 percent annualized returns compared to 6.2 percent for traditional property types.4
Public real estate investment trusts (REITs) have spearheaded the adoption of alternatives, enabling access to a wide range of real estate assets while the private real estate market has approached allocations with more caution. REITs have increased their allocations to alternatives in the public markets from 26 percent in 2000 to more than 50 percent in 2024.5 Meanwhile, following the pandemic, the original NCREIF Fund Index — Open End Diversified Core Equity (ODCE), an index of 25 private funds — responded to the growing demand for some alternative types by adding these asset classes to the index, but core property types still make up more than 90 percent of the total value (figure 2).6
In the current environment of elevated interest rates and vacancies, some properties within core sectors are facing structural challenges. With capital locked up in aging assets facing value erosion, some investors could pivot to alternatives. Some private funds that have substantial capital reserves are acquiring existing REITs, their underlying assets and operating platforms.7 In 2022, American Campus Communities became the last of the four US public student housing companies to be taken private.8 This follows the previous acquisitions of EdR by Greystar, Campus Crest by Harrison Street and GMH Communities by American Campus Communities.9
Meanwhile, advances in technology, demographic shifts and housing affordability could make alternatives a long-term, durable asset class. Artificial intelligence and 5G innovations are spurring investor interest in data centers and cell towers.10 In the United States, the 75-plus age group will grow to 40 million by 2040,11 which underpins an expected demand for senior housing facilities and life sciences properties. Meanwhile, a persistent lack of affordable housing has boosted consumer interest in self-storage and institutional-grade manufactured housing.
The next generation should bring different philosophies
In Deloitte’s 2025 commercial real estate outlook survey, which polled C-suite real estate leaders and their direct reports, we asked which property sectors could present the greatest opportunities going forward. Respondents who were 40 or younger selected alternative property types nearly 10 percent more frequently than respondents over 40. Since nearly 60 percent of industry leaders are expected to hit the age of retirement within the next decade,12 an influx of next-generation leaders will be stepping into these roles. This could accelerate the shift toward alternatives.
However, it will likely take time to reallocate capital across portfolios from core properties to alternatives. Currently, elevated interest rates and uncertainties in the global economy have made shifts in portfolio strategy more difficult to execute.13 Should conditions around real estate dealmaking, lending and fundamentals continue to improve — as predicted by nearly 90 percent of global real estate leaders for 2025 — reallocation opportunities could arise as the next wave of leaders in real estate prepares to take charge.14
Recent investor patterns point toward a couple of key subsectors within alternatives as potential drivers of growth. Through the end of 2024, active managers were most frequently reallocating funds toward the digital economy, including data centers and telecommunications, and health care sectors.15 In the 2025 commercial real estate outlook survey, digital economy properties were ranked second as the asset class with the greatest opportunity for investment and ownership through 2025.16
Navigating the shift toward alternative properties
As owners and investors pivot their portfolios toward emerging sectors, they could consider focusing on:
- Active management and experienced partnerships. Investors should be aware of operational, regulatory and industry-specific nuances to managing these property types. Partnerships like joint ventures could be an inroad to enable less experienced partners for certain asset classes with available capital to collaborate with experts who have specialized knowledge.
- Regional supply and demand gaps. Regional differences could impact availability. Some areas may lack assets; others may face regulatory hurdles. Energy availability and costs can be key factors, especially for properties like data centers.
- Alignment with broader strategic goals. Alternative sectors have offered significant yields lately.17 But investors may consider choosing allocation strategies based on their long-term potential.
- Balancing alternatives with core property types. A shift to alternatives does not mean ditching core assets entirely. Having a diversified balance of core and alternative properties could help mitigate potential volatility risks.
Alternative property types are relatively immature assets compared with the major sectors that have driven traditional commercial real estate ownership. It will likely take a collaborative effort among partners, leaders and the next generation to bring these alternatives to the mainstream.
About this prediction
Ownership of commercial real estate assets in the United States can be split into two domains: public and private. Combining these two domains yields a representative portfolio allocation of owners and investors across US commercial real estate.
At the end of 2024, core property types accounted for 58 percent of total US commercial real estate values, while alternatives were 42 percent. Both of these were notable adjustments from a decade earlier, when the split was 65 percent and 35 percent, respectively.18 Following similar patterns of growth for the upcoming decade would yield a split of 49 percent core and 51 percent alternatives by 2034, making it the first year alternatives in this baseline case would exceed the value of core assets.
However, if we adjust the growth in alternative investments by the propensity for next-generation leaders to favor alternative assets over legacy core strategies — which we estimate is approximately 10 percent more often, based on responses to our 2025 commercial real estate outlook survey — the shift toward alternatives could accelerate. Under this next-generation leadership strategy scenario, alternative property types could grow to nearly 70 percent of all owned, US commercial real estate over the same time frame.
Authors
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Endnotes
1.Godwin Marfo Ahenkorah et al., “The role of public and private strategies in real estate,” J.P. Morgan Asset Management, 2024.
2. Larissa Belova et al., “The case for U.S. core real estate,” CBRE investment Management, 2023.
3. DCFS analysis of Nareit and NCREIF data, accessed Q3 2024.
4. Darin Turner, “The growing role of specialty sectors in real estate portfolios,” PREA Quarterly, Winter 2023.
5. Geoffrey Dybas et al., “Listed non-core real estate opportunities,” Duff & Phelps, March 2024.
6. DCFS analysis of Nareit and NCREIF data, accessed Q3 2024.
7. Ahenkorah et al., “The role of public and private strategies in real estate.”
8. Leslie Shaver, “The last public student housing REIT goes private,” Multifamily Dive, June 6, 2022.
9. Ibid.
10. Turner, “The growing role of specialty sectors in real estate portfolios.”
11. Ibid.
12. James Baker and Tim Coy, “The US real estate industry workforce faces a retirement cliff,” Deloitte Insights, May 29, 2024.
13. JLL, “Sector diversification will require agility, creativity and time,” December 5, 2023.
14. Jeffrey J. Smith et al., “2025 commercial real estate outlook,” Deloitte Insights, September 23, 2024.
15. Nicole Funari, “Actively managed real estate fund tracker: 2024Q3,” Nareit, November 17, 2024.
16. Smith et al., “2025 commercial real estate outlook.”
17. Turner, “The growing role of specialty sectors in real estate portfolios.” Recent historical performance may not be indicative of future results.
18. DCFS analysis of Nareit and NCREIF data, accessed Q3 2024.
This article contains general information and predictions only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
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