The Growing Importance of Specialized Real Estate Funds
In the current climate of heightened public market volatility, alternative investments are gaining favor as a more substantial portion of investor portfolios, carving out more niche opportunities within real estate. These include specialized sectors like public housing, data centers, industrial outdoor storage, continuation funds, and film production studios. Notably, larger investment entities are creating more focused and sizable funds—a trend that isn’t new but is gaining momentum.
The longer-term investment horizon of alternative assets can offer a buffer against the fluctuations of more liquid investments.1 Moreover, Opportunity Zone projects continue to attract a particular investor cohort, even with the approaching deadline for capital gains deferral benefits at the end of 2026 and the 10-year hold period for additional tax benefits.
Long-Term Benefits and Risk Management in Real Estate Investment
Investors are now prioritizing managers with a proven track record in both establishing and running a fund structure. Essential components of this expertise include robust legal framework, clear investor communication, and thorough financial and tax planning and reporting. To accommodate RIAs and wealth managers acting for certain accredited or qualified clients, these funds are reducing minimum investments and emphasizing diversified portfolios—not merely by sector, but across various geographies, tenant profiles, and risk categories.
Furthermore, operators that possess specialized knowledge in a particular sector and can distinguish themselves from competitors are finding more transaction opportunities and capital availability. Several industries and regions are experiencing a supply and demand imbalance, some resulting from a slowdown in development since interest rates have increased (e.g., multi-family) and others due to a perceived decline in performance dynamics (e.g., retail and student housing).
Understanding Impact Investments
Projects with attractive Environmental, Social, and Governance (ESG) credentials, including affordable housing, renewable energy projects, and those in Opportunity Zones, can provide a unique proposition to investors. However, it’s clear that investors will not compromise on risk/return expectations for the sake of impact alone. While the allure of impactful projects is strong, due diligence and financial prudence remain paramount.
Feel free to reach out to me to continue this conversation. Let’s share insights, discuss opportunities, and collaborate on shaping the future of our industry together.
Source: Markets Group: 8th Annual Real Estate Midwest Forum 4/17/24
- WSJ April 18, 2024, Pension Funds Pulling Hundreds of Billions From Stock
