Introduction
In recent years, the real estate investment landscape has witnessed a significant shift towards alternative asset classes, as investors seek to diversify their portfolios and capitalize on the unique characteristics and demand drivers of niche sectors. From data centers and self-storage facilities to life sciences properties and student housing, these alternative asset classes offer the potential for attractive risk-adjusted returns and low correlation to traditional real estate sectors. In this research report, we examine the growing investor interest in alternative real estate asset classes and explore how Warm Springs Capital is navigating this landscape to identify attractive investment opportunities and build a diversified portfolio.
The Growth of Alternative Real Estate Asset Classes
According to a recent survey by Preqin, assets under management in alternative real estate asset classes have grown by 57% over the past five years, reaching a total of $640 billion in 2020. This growth has been driven by a range of factors, including the search for yield in a low-interest-rate environment, the increasing sophistication of investors, and the desire for portfolio diversification.
Our analysis of the performance of alternative real estate asset classes over the past decade indicates that they have delivered strong returns relative to traditional sectors. For example, data centers have generated an average annual total return of 12.5% over the past 10 years, compared to 9.2% for the NCREIF Property Index. Similarly, self-storage facilities have delivered an average annual total return of 11.3% over the same period, while life sciences properties have generated an average annual total return of 13.7%.
Warm Springs Capital's Approach to Investing in Alternative Real Estate Asset Classes
To capitalize on the growing investor interest in alternative real estate asset classes, Warm Springs Capital has developed a specialized investment strategy that focuses on three key niche sectors: data centers, self-storage facilities, and life sciences properties. Our approach is driven by a deep understanding of the unique characteristics and demand drivers of each sector, as well as a rigorous investment process that emphasizes disciplined underwriting, active asset management, and strategic partnerships with best-in-class operators.
1. Data Centers
The growth of cloud computing, big data, and the Internet of Things has fueled strong demand for data centers, which provide the critical infrastructure for the digital economy. Our analysis of the data center market indicates that demand for data center space is expected to grow by 12% annually over the next five years, driven by the increasing adoption of cloud services and the proliferation of data-intensive applications.
To capitalize on this opportunity, Warm Springs Capital has assembled a portfolio of 15 data center properties across key markets in North America and Europe, with a total value of $1.2 billion. Our investment strategy focuses on acquiring and developing state-of-the-art facilities in strategic locations, with a focus on markets with strong connectivity, reliable power, and favorable business climates. We have also formed strategic partnerships with leading data center operators, such as Equinix and Digital Realty, to ensure the efficient operation and management of our facilities.
2. Self-Storage Facilities
The self-storage sector has proven to be one of the most resilient and attractive alternative real estate asset classes, benefiting from strong demand drivers such as population growth, urbanization, and changing consumer lifestyles. Our analysis of the self-storage market indicates that demand for self-storage space has grown by an average of 7% annually over the past five years, while occupancy rates have remained above 90%.
To capitalize on this opportunity, Warm Springs Capital has built a portfolio of 25 self-storage facilities across key markets in the United States, with a total value of $500 million. Our investment strategy focuses on acquiring and developing high-quality facilities in dense, high-traffic locations, with a focus on markets with strong demographic trends and limited supply. We have also formed strategic partnerships with leading self-storage operators, such as Extra Space Storage and CubeSmart, to ensure the efficient operation and management of our facilities.
3. Life Sciences Properties
The life sciences sector has emerged as a key driver of growth in the alternative real estate asset class, benefiting from strong funding for biomedical research, the growth of the biotech and pharmaceutical industries, and the increasing demand for specialized laboratory and office space. Our analysis of the life sciences real estate market indicates that demand for lab space has grown by an average of 10% annually over the past five years, while vacancy rates have remained below 5% in key markets such as Boston, San Francisco, and San Diego.
To capitalize on this opportunity, Warm Springs Capital has assembled a portfolio of 10 life sciences properties across key innovation clusters in the United States and Europe, with a total value of $750 million. Our investment strategy focuses on acquiring and developing state-of-the-art facilities in close proximity to leading research institutions, hospitals, and biotech companies, with a focus on markets with strong intellectual capital and favorable business climates. We have also formed strategic partnerships with leading life sciences real estate operators, such as Alexandria Real Estate Equities and BioMed Realty, to ensure the efficient operation and management of our facilities.
Case Study: Warm Springs Capital's Investment in a Life Sciences Portfolio
To illustrate our approach to investing in alternative real estate asset classes, consider our recent investment in a portfolio of three life sciences properties in the Boston-Cambridge market. Our analysis of the market identified strong demand drivers for life sciences real estate, including the presence of world-class research institutions such as Harvard and MIT, a deep talent pool of biotech and pharmaceutical professionals, and a favorable regulatory environment.
To execute on this opportunity, we partnered with a leading life sciences real estate operator with a proven track record of developing and managing state-of-the-art facilities. We invested $250 million in a portfolio of three properties totaling 500,000 square feet, including a newly developed lab building and two value-add office properties that were retrofitted for life sciences use.
Since closing the investment in 2019, we have worked closely with our operating partner to lease up the properties to a diverse mix of tenants, including biotech startups, established pharmaceutical companies, and academic research institutions. As a result of these efforts, the portfolio has achieved a current occupancy rate of 95% and has generated an internal rate of return of 18% since inception, exceeding our initial underwriting expectations.
Conclusion
The rise of alternative real estate asset classes presents significant opportunities for investors who are able to navigate the unique characteristics and demand drivers of these niche sectors. At Warm Springs Capital, we believe that our specialized investment strategy, our deep market expertise, and our strategic partnerships with best-in-class operators position us well to capitalize on these opportunities and deliver attractive returns for our investors.
As we look to the future, we remain committed to staying at the forefront of this rapidly evolving market and to identifying and executing on the most compelling investment opportunities in alternative real estate asset classes. Through our rigorous investment process, our active asset management approach, and our commitment to delivering value for our stakeholders, we are well-positioned to continue building a diversified, high-performing portfolio of alternative real estate assets.
