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Assets that focus on ‘basic human needs’ provide great CRE investment opportunities

Many “state of the commercial real estate industry” reports tend to note how much office CRE has struggled since the COVID-19 pandemic. While that sector has had its struggles, there are other parts of the industry that have shown signs for optimism, such as those that focus on basic human needs, GlobeSt.com reports.

DLA Piper Global Real Estate’s recently released its 2023 “State of the Market Survey” results. Respondents noted assets that address basic needs such as medical offices, grocery-anchored retail and senior housing as the most attractive compared to the 2022 survey. Medical offices increased from 28 percent to 37 percent, while grocery rose from 22 percent to 27 percent and senior housing almost doubled from the year prior (13 percent to 25 percent).

“This suggests that many commercial real estate leaders see these asset classes as opportunities in the coming year, even amid uncertainty and challenges in other sectors,” the report said.

In connection with those assets that focus on basic human needs, multi-family housing was one of the most attractive investment opportunities in DLA Piper’s survey—only logistics, warehousing and cold storage placed higher. Affordable and workforce housing increased 11 percentage points since 2022, “further signaling a shift toward development planning that aims to address basic needs,” according to report.

The CRE industry may have its share of challenges, but investors still see it as a good place to put their money, according to the report. Real estate private equity funds have already raised record amounts of capital, and institutional investors keep allocating parts of their investments to real estate.

“The fundamentals for many property types remain strong, and debt levels are generally lower than in past cycles,” the report said. “In fact, ‘strong fundamentals across assets classes’ were the number-one reason that bullish respondents cited for their optimism, increasing from 20 percent in 2022 to 37 percent this year. There are signs that investors are turning toward stable, safe assets amid uncertainty, and these results suggest that they are confident in the underlying strength of those asset classes.”

The asset classes that survey respondents said they currently find attractive in terms of investment opportunities are already trending in the right direction, according to DLA Piper. Medical real estate development has seen record-high rents and demand that is outpacing supply in the sector. Meanwhile, grocery-anchored retail had a record year in 2022 with transactions totaling nearly $15 billion. Senior housing investors see stability in that market as well—approximately 90 percent said they’d increase or maintain their current exposure to the sector.

Meanwhile, developers are building these types of assets outside of the traditional central business district (CBD) areas, the report said. Given that people are spending more time at home than their offices, they want essential services such as doctors’ offices and grocery stores to be located closer to residential areas.

“Where people are spending their time has changed, but their desire for convenience and easy access to the services they need has not,” the report said. “As more people spend at least some time working from home, retail stores, restaurants, food delivery services, bars, gyms, and similar service-oriented establishments in residential areas of cities such as New York, Los Angeles, and Chicago are thriving.”

Overall, the DLA Piper survey respondents remained optimistic about the CRE industry’s prospects going forward.

“The industry now faces challenges such as increasing interest rates, slower growth, and inflation,” the report said. “Despite these challenges, our survey found that decision-makers across the industry believe that there are investment opportunities in asset classes that have solid fundamentals and secular tailwinds, especially those that service human necessities, such as medical office, grocery-anchored retail, and housing.”

Click here to read DLP Piper’s full report.



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