Finding Resiliency in Commercial Real Estate with Demand-Driven Sectors

Topics: ,Capital Markets/Commercial Real Estate ,Manufactured Housing ,Self Storage ,blog-post ,Student Housing Healthcare

In a world where markets can be as unpredictable as the weather, commercial real estate has historically been a steadfast harbor for investors seeking resiliency and long-term growth. However, it's crucial to stay abreast of industry trends that can significantly impact the growth of various real estate sectors. One such trend is recognizing the importance of demand-driven property types.

Understanding the Factors Behind Resilient Real Estate Sectors

The resiliency of a real estate sector often hinges on the strength of its demand drivers and tendency to weather economic downturns better than those with less predictable influences.

In this article, we introduce you to five commercial real estate sectors that we believe are well-positioned to capitalize on demand drivers: Self-Storage, Healthcare (including Senior Housing and Medical Office Buildings), Student Housing and Manufactured Housing.

Self-Storage: Capturing Enduring Demand

Self-storage is one of the most resilient sectors in commercial real estate, thanks to the Four Ds: death, divorce, downsizing, and dislocation. These demand drivers tend to result in a consistent need for storage facilities, regardless of economic conditions.

Additionally, we believe that self-storage is uniquely positioned to capture increasing demand from urban-dwelling millennials and e-commerce entrepreneurs who require extra space for their belongings and inventory.

National Self-Storage Report

"Leasing season demand has remained strong in many markets. Average street rates for 10x10 units increased in roughly half the top 31 metros month-over-month in June 2023. Street rates for 10x10 units increased $2 in two markets and $1 in another 12 markets.1" - National Self-Storage Report, Yardi Matrix, July 2023.

 

Healthcare: Meeting the Needs of an Aging Population

The healthcare sector comprises various subcategories, including Senior Housing and Medical Office Buildings (MOBs).

Senior Housing: Meeting Residents’ Needs and Desires

Demand for senior housing is growing, partly due to an aging population that is finding it too challenging to age in place in current homes and needing more of the assistance senior housing can provide. Moreover, we believe that seniors increasingly prefer the sense of community, advanced technology, safety, wellness, and healthcare accessibility offered by modern senior housing facilities. This demographic shift is expected to generate strong demand for senior housing over the next few decades.

Senior Housing Faces the 'Silver Wave’

"Investors are watching several tailwinds pushing strong demand for senior housing in the U.S. over the next 10 to 30 years. One is the age of the Baby Boomer generation. Another tailwind is the population of seniors with Alzheimer's, dementia, or other cognitive impairment, which is expected to grow to 14 million over the next 30 years, from six million today.2" - perenews.com June 2023

 

Medical Office Buildings (MOBs): A Growing Niche

Medical Office Buildings (MOBs) are experiencing real transactional momentum due to an aging population's increasing demand for healthcare services. In our view, the desire for accessible outpatient care and services the MOBs offer is a significant driver for this commercial real estate sector.

Experts Say Now Is the Time to Buy MOBs

"In total, the U.S. healthcare industry represents 17% of GDP. Outpatient care and care provided in medical office buildings is a significant share of the total. The sector has also been shifting to a retail mindset, where hospital systems and providers look to attract new patients and build market share in new areas, contributing to the increased demand for high-quality medical space."3 - globest.com Nov. 2, 2023.

 

Student Housing: A Niche Sector with Resilience

The off-campus student housing sector is another bright spot in the commercial real estate landscape. The steady enrollment at top-tier universities and limited on-campus housing options have contributed to a consistent demand for off-campus student housing.

With new supply continuing to moderate4, many markets continue to see demand outstrip supply.5 This resilience is evident, with only a handful of markets at risk of overbuilding.

Student Housing Is Earning High Marks from Developers

"In most markets, demand is expected to outweigh supply in the near term. New development deliveries are down significantly due to the pause that happened during COVID. Only a handful of markets are at risk of overbuilding.6" - multihousingnews.com June 1, 2023.

 

Manufactured Housing Communities: Affordable and Efficient Real Estate Solutions

In an era of escalating housing costs and evolving lifestyle preferences, Manufactured Housing Communities (MHCs) have emerged as a resilient and attractive sector in commercial real estate. These communities offer affordable housing solutions, a feature that becomes particularly appealing in times of economic uncertainty.

The Appeal of Affordability and Community

MHCs cater to a diverse demographic, from retirees looking for cost-effective living options to young families seeking their first home. We believe the affordability of manufactured homes, combined with the sense of community these settings offer, can drive consistent demand.

Moreover, the lower cost of construction and maintenance for manufactured homes compared to traditional housing further enhances the investment appeal of this sector for us.

MHCs also tend to benefit from lower turnover rates. Residents who own their homes but rent the land are less likely to move frequently, often providing investors with long-term income streams. This can be a significant advantage in times of economic volatility.

"The demand for affordable housing has reached unprecedented levels. Modern manufactured homes offer exceptional quality while priced up to 50% lower per square foot than traditional site-built homes. To put this into perspective, the typical price per square foot for a site-built home is $139.20, whereas a manufactured home averages $72.46 per square foot. This significant cost advantage enables a growing number of Americans to achieve homeownership, bridging the widening gap in housing affordability.7" - Matthews.com; Manufactured Housing Update, August 2023.

 

Commercial real estate remains a strong investment strategy even during market periods where supply and demand imbalances tend to occur. The key is to identify sectors with robust and consistent demand drivers. The sectors highlighted in this article, including Self-Storage, Healthcare (Senior Housing and MOBs), Student Housing, and Manufactured Housing Communities may offer opportunities for those seeking stability and long-term growth. 

 

1 Yardi Matrix. National Self Storage Report. July 2023

2 Pere News. Senior Housing Faces Silver Tsunami. Jun 2023

3 Globest. Why Experts Say Now is the Time to Buy Medical Office Buildings. Nov. 2023

4 Fannie Mae. Spring 2023 Off-Campus Student Housing Update

5 Student Market Housing News. A Look at the Current Student Housing Market. October, 2023

6 Multifamily News. Why Student Housing is Earning High Marks From Developers. June 2023

7 Matthews.com. Manufactured Housing Update. August 2023