Niche Markets within Commercial Real Estate Sectors

I grew up in Iowa, and many days were spent out on my grandfather’s farm.  A far cry from my life in Chicago, but if you are familiar with the midwest, this probably comes as no surprise.  More than 80 percent of the land in Iowa is farmland, and almost everyone has a close relative who owns a farm. 

As a kid, I thought you had to inherit a farm to own one, and I thought you had to work the land yourself if you owned it.

As an investor, I now know that’s not true.  Investment syndicates can own farmland, then lease it to farmers, just as industrial real estate investors might own a warehouse and rent it to an e-commerce giant like Amazon. 

That’s the beauty of real estate investing.  You have the opportunity to invest in a number of niche real estate sectors as another means of diversifying your investment portfolio.  Even if you are not called to invest in agriculture, there are several other asset types that might be flying under your radar.  

Because sometimes the road less traveled leads you to the best places.

Niches by Sector

You can slice and dice real estate sectors by type, strategy, location, etc., but here are the high-level categories:

  • Residential
  • Single-family rentals
  • Multifamily apartments
  • Student housing
  • Mobile home parks
  • Senior housing
  • Assisted living
  • Affordable / workforce housing
  • Development / speculation
  • Lodging
    • Hotels
    • Motels
    • RV Parks
    • Airbnb/short-term sharing rental
  • Industrial
    • Warehouse
    • Flex office/manufacturing
    • Self-storage
  • Office
    • Medical office
    • Life science / R&D
    • General office
  • Retail
    • Strip centers
    • Shopping malls
    • Big box stores
  • Land / Agricultural
    • Farmland
    • Forest/timber
    • Ranches
    • Speculative land banking 
    • Parking lots 
  • Loans / Financing
    • Short-term bridge financing
    • Hard money lending
    • Mortgage financing

When you are investing as part of a syndicate, you can put your money toward several different ventures. Instead of buying a duplex or a multifamily complex, your investment dollars can be spread across several mainstream and niche options. 

While many of my fellow investors have probably never considered these as viable investment options, I like to remind clients that only 40 or 50 years ago, there was almost no way for ordinary investors to invest in commercial real estate.  In the 1970s, the office real estate market opened up, followed by multifamily in the 1980s and self-storage the following decade. 

Niches like manufactured housing are rapidly attracting new investors, and this trend is likely to continue as technology advances and both information and investment access become more mainstream.

Same, but Different

As indicated by the list above, real estate sectors can be broken down into a significant number of niche markets.  To ensure you are truly diversifying your portfolio and making the most of your investments, consider that individual investments in the same category may have vastly different uses and potential buyers/renters. 

For example, the industrial niche includes both self-storage and warehouses.  The potential client pool for the two is very different—with consumers being more likely to make use of self-storage and businesses more likely to rent out warehouse space. 

When investing in mineral rights, oil companies and solar/renewable companies may both be interested in leasing rights. However, their revenue and the way they plan to use or access the land can be very different. 

Life science office space caters to a very specific niche while traditional office space is more open-ended.  Life science offices may contain lab space related to medicine or biology, where general office space is multi-purpose.  How might this affect your investment’s pertinence in the market?  General office space might make it easier to maintain tenants but will fetch lower rental rates.  On the other end of the spectrum, specialized life science office space might have more lucrative fees but higher vacancy rates.

Discerning Supply & Demand

As referenced above, a niche investment can come with some potential for lower liquidity. If there are fewer potential buyers/renters in the market, it may be harder to keep a space filled—meaning fewer buyers in the market and a harder sell (i.e., lower exit price).  

This information will help investors to pick and choose comparable investments in similar niches or exclude those they are not interested in at all.  It should also help define the landscape of the entire real estate market, not the mixed bag of multifamily, office, and retail we have become so accustomed to. 

There are sponsors and investment professionals who have “niched down”—meaning they are keyed into their market(s).  If you are strongly considering a specific niche real estate option, find an expert who has experience in that specific sector and who can guide you through a thorough evaluation of both its benefits and its potential pitfalls. 

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