Coming off a year unlike any other, the world of commercial real estate investing is looking for fresh opportunities. New challenges in the world have created new opportunities, if you know where to look. We examined seven property types that are increasingly catching investors’ eyes.
1. Cold storage
A growing population, the growth of food delivery and the distribution of vaccines for the deadly pandemic are spiking investor interest in cold storage. The niche warehouse type is attracting speculative development and institutional investment. Consumer eating habits are changing as people buy more frozen food online. All that product being delivered needs cold storage which can be hard to find.
Speculative development of cold storage has a high barrier to entry, enticing investors even more. Cold storage typically costs three to four times what a regular warehouse does. The need for insulation makes precast walls unfeasible. To prevent ice build up, coats of Glycol and floor heating are industry standard. Cold storage facilities require complex engine rooms to house equipment for freezing and fail safe power sources to prevent loss. All that complexity means higher rents, typically two to three times that of traditional storage.
Where cold storage stands out for investors is in cubic foot efficiency. Cold storage facilities have much higher clear heights, sometimes as high as 50 feet, allowing tenants to stack for maximum efficiency. New cold storage facilities will shift global produce trade routes. For decades South America’s verdant produce has been routed through South Florida. New cold storage development in Texas has some logistics operations rethinking supply lines.
2. Historic districts
The growing American cultural obsessions with bespoke and artisanal architecture has investors looking at historic assets as investment opportunities. Owning property in a historic district is one of the most unique opportunities in all of real estate, accompanied by a unique set of challenges. The aesthetic of a historic property can drive rents up, in addition to having much higher average financial appreciation than traditional property. Some of the nation’s largest tenants have signed massive leases at historic offices and even short-term rentals in historic areas can charge premiums.
In most historic districts, state and local governments offer tax and other incentives to encourage investment. That’s because investing in historic property is hard. Maintenance can bleed you dry as problems from old age stack up. Any fixes or changes to the property are tightly regulated by historic restrictions, dictating what work can and cannot be done. Old structures also come with a slew of safety hazards from buildings materials of a bygone age, like asbestos and lead. The road is rough, but if investors can master it, the benefits are great. Placemaking is at the heart of successful developments and historic sites are perfect for placemaking. Some of the most successful developments of the past decade are rooted in history.
3. Tiny homes
Living in a tiny home sounds crazy, but investing in them sure isn’t. Growing trends on social media has Millennials looking to tiny homes for short term rentals and vacation spots, making them a commercial investment opportunity. Tiny homes cost almost nothing to develop, the average tiny home runs just over $46,000. That can be an issue, making financing tiny homes unfeasible.
But, there’s practically no upkeep cost, very little maintenance and best of all, most tiny homes can be moved. Affixing a trailer hitch to tiny homes allows anyone with a truck to change the location of their investment property, meaning it can function as a vacation property, affordable or workforce housing. Building and flipping tiny homes can also be lucrative in the right market. Dealing with small money means managing overhead is paramount to profitability. Luckily, with tiny homes, variables are fewer and more manageable. For those not ready to dive into the world of multifamily, investing in a few tiny homes could be a great start.
As a niche investment class, self-storage is one of the old guard. For decades self-storage has carved out of one of the most profitable investment niches. The pandemic has created a slew of new opportunities in the sector that deserve a fresh look. As some owners struggle, many are looking at historically low interest rates, hoping to refinance, but will be unable to at expected LTV ratios, pushing them to sell. Portfolios that are underwater may be looking to sell their self-storage assets, which do well during recessions, offering a financial lifeline.
Self-storage REITS have beat the Dow Jones Industrial average over the past year. Developers are finding new locations for self-storage sites, repurposing languishing malls and big box retail locations into new self-storage facilities. Strong performance during recessions has given underwriters confidence in financing loans at reasonable rates, fueling development.
5. Data centers
During the pandemic, data centers worked overtime, hosting our Zoom meetings and streaming our latest binge. Demand for data centers is only increasing. CBRE is forecasting that total data center inventory will grow by 13.8 percent in 2021. Data centers may host digital real estate and cloud services, but location is still the name of the game. Most data center investment is in specific hubs, most notably Northern Virginia, DFW, Chicago, Silicon Valley, Phoenix and Atlanta.
Smaller facilities exist in every major metropolitan area, but are fighting an uphill battle against data hosting giants. The economy of scale for data centers means facilities are getting larger and larger, allowing them to drop hosting fees lower and lower, pushing smaller players out of the market. Still, there’s big money to be made. Spending on global data center infrastructure is projected to climb to $200 billion in 2021, up 6 percent from 2020, according to the latest forecast from Gartner.
6. Ghost kitchens
Delivery apps like Postmates, Doordash and UberEats have turned kitchen-as-a-service space into a legitimate investment class. The tiny segment served caterers and then food trucks for years. Now hundreds of millions are pouring into the niche sector with major players like Kroger getting in on the action. Uber co-founder Travis Kalanick has quietly built a ghost kitchen empire, shelling out $130 million for 40 properties across the country.
Ghost kitchens are notoriously hard to track, that’s part of the magic. UberEats reportedly operates an army of 5,000 ghost kitchens globally, but where exactly they are, is obscured by design. A customer knowing the specific location sets expectations. If it’s too far, they may question speed and freshness. If it’s too close, they expect faster times that might not be reasonable. The obscured nature of ghost kitchens offers unique opportunities for investors. Ghost kitchens can pop up practically anywhere, filling odd spaces, even parking lots. Last year, investors spent $5.5 billion on ghost kitchens at an average deal size of $15 million, according to Pitchbook.
The future of movie theaters hangs on a knife’s edge. The pandemic shut them down, some states have opened them back up, but movie goers are still staying away. Financial pressure from low attendance is being compounded by studios, which are refusing to release blockbuster films or choosing to release them directly to viewers via streaming after dismal domestic box office performances from films like Tenet.
The struggle has devolved into chaos for most theater operators. National chains have been particularly hard hit, posting billions in losses. The pandemic has resulted in a 65.7 percent decline in US cinema revenue, according to PriceWaterhouseCoopers. With numbers like that, closures are bound to come. How to repurpose theaters is a conundrum worth paying attention to. Sloped floors and subdivided spaces limits redevelopment potential, requiring adaptive reuse to get creative. Cinemas have been converted into medical offices, traditional offices and Municipal government services. High clear heights and proximity to commercial corridors make them an enticing option for conversion into last mile delivery fulfillment centers. For most, demolition may be the best option. The land they sit on is simply too valuable.