CRE N Illinois

Beyond the basic food groups: Three niche property types becoming the darlings of the late-stage real estate cycle

| Tim Madigan | Commercial Loan Orignator, Alliant Credit Union

Beyond the basic food groups,ph1
There are three sectors that investors should focus on this late in the cycle.
Beyond the basic food groups,ph2
Tim Madigan of Alliant Credit Union

If the threat of a recession is clouding your investment outlook these days, you aren’t alone. The inverted yield curve has many investors looking for safe opportunities as the possibility of a downturn looms larger. In search of safe investment havens, they are finding opportunities in some unusual deal types.

Niche product types are attracting the massive amount of capital in the market waiting to be deployed. As of April 2019, private real estate investors were holding $338 billion of dry powder waiting to be invested, according to research firm Preqin. In the major asset classes, competition for deals is fierce, particularly in the industrial market where high demand and rent appreciation are driving valuations to record highs.

Investors willing to venture off the beaten path will find unique opportunities in specialized markets such as self-storage, parking and manufactured housing. Investors are finding that these specialty deal types offer significant opportunity and value.

Self-storage facilities: Resilient through the cycles

A building full of concrete-walled cubes may not sound enticing, but the resiliency of the self-storage market is attracting notable investor interest. The flexibility of these facilities means they can weather the turns of the economy, as storage space always seems to be in demand.

During a recession, for example, families may need a place to store furniture and sentimental items if they downsize into a smaller home. And during a boom cycle, self-storage facilities can offer short-term product warehousing for small businesses or for luxury goods like art collections or boats.

Some major markets are nearly oversaturated with self-storage facilities, but there is a significant need for space in many secondary and tertiary markets. If you’re considering a self-storage investment, it’s important to thoroughly understand the local marketplace: the supply and demand, customer needs and the competitive landscape. Facilities that cater to the needs of today’s consumers—with climate-controlled space, enhanced security and other amenities—will be well-positioned throughout the cycles.

Parking: In high demand amid rising urbanization

Talk to urban millennials for five minutes and you might be tempted to dismiss parking facilities as a smart option for the modern real estate investor. After all, with a generation that appears to prefer mass transit and ride-sharing apps, who needs parking?

Yet the reality is that cars aren’t dead yet. Urbanization is indeed on the rise yet demand for parking garages increases since most people still like their cars, even when they live, work and play in dense urban neighborhoods. The U.S. parking industry is a $9.8 billion market (measured by revenue), and has grown a steady 1 percent annually since 2015, according to IBISWorld.

In this market, the old adage of the real estate industry—location, location, location—rings particularly true. Is the structure important to the general area, and what’s drawing in drivers to fill spaces day and night? Is it the least expensive option? Is it the most convenient or closest option to popular destinations? These factors can help understand if a particular facility is a sound investment today.

Thinking long term, investors cannot ignore the fact that consumer driving trends will continue to change, particularly as autonomous vehicles become more commercially viable. It’s important to consider the long-term prospects for the property, and whether there are alternative uses for the location if parking demand decreases. There may be future development plans or additional sources of income that the property can take advantage of, such as building out the first floor for retail, office or storage space.

Manufactured housing: Snowbirds and hipsters fueling a sunny outlook

Maybe it’s the impact of Instagram and a new generation of consumers who seek experience-driven lifestyles, but manufactured housing has undergone a renaissance over the past several years. And the trendiness of tiny homes among hipsters is more than a passing fad.

There tends to be a need for manufactured housing throughout many life stages and all economic cycles. On one end of the spectrum, retirees fuel demand for manufactured housing villages in warm climates. In fact, demand in the Southeast is so strong that three warm climate states alone—Florida, North Carolina and Georgia—together account for 15.8 percent of all manufactured housing shipments, according to Wells Fargo data.

Snowbirds aren’t the only demand drivers, however. Manufactured housing is a viable alternative to apartment living for young people who are just starting out with full-time employment or creating a household but can’t yet afford a single-family home. Prefabricated homes can also provide a supply of affordable housing where other multifamily options may be priced too high. Additionally, while this asset class is mobile in theory, it tends to attract very loyal tenants who remain surprisingly faithful to their chosen location.

Avoiding the risks of over-leveraging

In an economic cycle in which deals are few and far between, investors don’t need to take on high risks, but they might need to think outside the box in terms of property types. Additionally, while the outlook for self-storage, parking and manufactured housing is bright, no investment comes without some risk factors.

As the threat of a recession looms larger, it is particularly important to avoid overleveraging your property and pursuing full-term, interest-only deals. Loans that are retained on a lender’s balance sheet can be modified in response to adverse circumstances. Do your due diligence to find a relationship lender who wants to see you succeed.

Investors who take care to avoid unnecessary risks will be well-positioned to ride the waves of the next cycle, wherever the tides may take us.

About the author

Tim Madigan is a Commercial Loan Orignator at Alliant Credit Union.