The real estate sector is evolving as investors seek yield and users of real estate assets re-evaluate how they interact with the built environment. The composition of real estate portfolios is also changing, with increasing investor interest in what were previously considered niche asset classes, such as infrastructure and student housing. Many of the emerging asset classes are complex and operationally intensive, which is impacting return expectations, investor reporting obligations and staffing requirements of investment vehicles.
According to MSCI, global transaction volume for income real estate in the first quarter of 2024 was $130.2 billion, down 19% year over year. The decline in transaction volume is partly due to structural changes in historically important investment sectors such as office buildings. As discussed in the PwC and Urban Land Institute's “Emerging Trends in Real Estate 2024” report, there is a dire need to cede from traditional asset classes.
Technology requirements and housing shortages are causing investors to shift their focus and portfolio composition away from traditional asset classes and towards data centers, student housing and rental properties. Despite the overall decline in deal volume, sales volume in the alternative sector increased 41% year-over-year in Q1 2024, accounting for approximately 70% of the quarter's overall deal volume.
There is also a growing trend of luxury retailers buying real estate in prime locations around the world to house their luxury collections and leverage their brand equity to expand into the hospitality and residential sectors. To achieve higher returns in the current interest rate environment, they may need to adopt more operationally intensive strategies to succeed.