Originally published in PERE
This article is sponsored by Harrison Street Asset Management
For decades, core real estate investments centered on the four main asset types. Today, institutional investors are looking beyond traditional sectors in search of stable income and resilient performance, according to Christopher Merrill, co-founder and global CEO of Harrison Street Asset Management, and Joey Lansing, co-president and global head of portfolio management.
They note that the definition of core real estate has evolved, and alternatives have become a growing part of institutional allocations as demographic, operational and investment characteristics shape core portfolios for the years ahead.
How has the industry’s definition of core evolved and how has investor perception of alternatives changed along with it?
Christopher Merrill: For decades, core real estate investments were limited to four property types: office, multifamily, retail and industrial, predominantly in gateway markets. In recent years, however, that definition has been rewritten. Sectors once dismissed as niche, such as student and senior housing, selfstorage, medical offices or data centers, are increasingly treated as foundational holdings in institutional core real estate portfolios.
When we launched Harrison Street in 2005, there were no major investment managers with a dedicated focus on alternative real estate. With a bit of foresight and early conviction, our thesis was that while many alternative sectors were historically underappreciated, they were linked to durable, demographic- and needs-based demand, giving them the defensive characteristics associated with core investing. Since then, we have seen tens of billions invested across alternative sectors and a maturation of the market, with a large percentage of investors considering alternative sectors an important and growing part of core allocations.
What has shifted most is not the sectors themselves, but how investors view them. We believe investors have come to appreciate the characteristic strengths of alternative real estate: sectors supported by structural and resilient demand, markets with attractive supply demand dynamics, and operators capable of creating value. The new definition of core is evident in the NCREIF Open End Diversified Core Equity Fund Index (NFI-ODCE), which was expanded in 2024 to explicitly incorporate alternative sectors and other formerly excluded categories. As a percentage of the NFI-ODCE, alternative property types accounted for more than 15 percent of gross asset value as of the second quarter, up from less than 4 percent a decade prior.
At what point did alternative sectors move into the institutional mainstream, and what changed the perception they were higher risk or specialist investments?
CM: We have seen a steady progression toward alternative sectors since Harrison Street was established. Early on, we spent a lot of time educating investors about student and senior housing, medical office and self-storage, demonstrating how these asset classes could play a role in a core institutional portfolio. Investors defined core real estate as high-quality, fully stabilized, income-producing properties. We had seen these qualities in alternative sectors, but widespread recognition of core alternative sectors across the industry had not yet crystalized.
That changed as the alternative sectors were tested and their resiliency was proven, under stressful market conditions like the global financial crisis, the global pandemic, persistent inflation and rising interest rates. Throughout these black swan events, stabilized properties in many alternative sectors demonstrated far less volatility and performed as well, if not better, than traditional real estate sectors. We launched the first open-end core strategy dedicated to alternative sectors back in 2011, and since then we have been able to showcase how alternative property types maintain strong liquidity and durability across market cycles.
Over time, as sector performance data matured, institutional quality operators emerged and transaction volumes grew, investor confidence in alternative sectors strengthened, driving broader adoption of core allocations. There has been a dramatic shift in investor conversations from, “Why do alternative sectors belong in my portfolio?” to, “I am looking to add these sectors to my portfolio, how do I gain core exposure at scale?”
What long-term societal, demographic and economic trends are having the greatest influence on how investors build core portfolios today?
Joey Lansing: The investment thesis for alternative real assets is based on durable, non-discretionary demand drivers – trends that unfold over decades rather than individual economic cycles. Factors such as an aging population, enrollment growth in higher education and the need for healthcare are powerful demographics underpinning senior housing, student housing and medical office.
Although no sector is entirely immune to recession, we have observed that, across multiple cycles, demand remained steady as students continued pursuing university degrees, the rapidly growing 80-plus population required more senior housing, and the need for healthcare delivery continued to grow.
Because these are essential and needs-based factors, rather than discretionary or correlated to GDP, demand tends to hold up even when broader consumer or corporate spending pulls back. In addition, many of these sectors have benefited from shorter lease terms or operating models that enabled owners to adjust pricing more rapidly in response to changing market conditions.
When evaluating a core strategy, what investment attributes matter most, and has the emphasis shifted toward demand durability and income resilience?
CM: Investors continue to value core strategies that focus on high-quality, fully stabilized, income-producing properties. However, we have seen an increasing focus by investors on additional characteristics that drive long-term performance: demand durability, cashflow growth, inflation protection, diversification benefits and how a given investment fits within broader portfolio objectives.
That same discipline shaped how Harrison Street built conviction in these sectors from the start. We have long focused on three factors: durable demand, supply discipline and strong operating fundamentals – prioritizing sectors where demand stems from essential, recurring needs rather than discretionary spending.
How are allocation trends evolving globally, particularly in Canada and Europe, where alternative sectors have matured in recent years?
CM: Core real estate investing across alternative sectors continues to grow in international markets, following similar trends in the US, but at a delayed timeline. We are seeing increased global capital inflows into Canada, which had been somewhat overlooked previously, and valuations in Canadian alternative real estate sectors are attractive relative to global real estate valuations.
The shift in European investors’ allocations to alternative sectors resembles what we saw in the US some 10 or 20 years ago. The same demographic forces, including a fast-aging population and higher university enrollment, are supporting strong demand in sectors like senior and student housing. Also, as investor interest has grown, many of the alternative sectors have now reached a critical scale, with a greater number of opportunities across the investment spectrum to invest in, or develop, institutional-quality real assets in several European markets.
How important is operational execution in delivering the stable income and downside protection investors expect from a core strategy?
JL: Alternative real estate is fundamentally operational. These asset classes require highly experienced managers with specialized skill sets. We believe the difference between average and exceptional outcomes is often determined by the way investors and their operating partners execute the business plan every day. Success requires a combination of strong operators and a specialized investment platform capable of sourcing opportunities, structuring investments and managing risk across the life of an asset.
A vital element of that platform is a robust framework for assessing the risk/reward profile of a potential investment, based on comprehensive proprietary datasets and analytical tools that can consider a wide range of property-specific, market, economic, geographic and operational factors to help guide capital allocation decisions.
We created our own proprietary analytical and risk-scoring model, H-PRISM, that converts our 20-plus years of operating insight and micro-market intelligence into a framework that informs our underwriting and investment decisions. While an even greater number of managers are starting to invest in alternative sectors, the fragmented nature of these markets creates a need to have local expertise and proprietary data to identify the correct investments in the right markets.
What separates a durable, specialized real estate sector from a trend that becomes overhyped?
CM: Durable, low-volatility sectors are anchored by demographic, technological or societal changes that unfold over decades and address essential human or economic needs rather than fleeting consumer preferences. Trends, by contrast, tend to attract capital faster than the market can support. The continued evolution of core institutional portfolios will require investors to look beyond near-term or cyclical trends. We believe investors should focus on assets supported by demand that is measurable, recurring and difficult to displace, backed by supply that remains disciplined over time. Ultimately, investing in core alternative real assets requires patience, discipline and a long-term perspective, focused on what is anticipated to remain essential decades from now, not simply what is attracting attention.
Which alternative sectors best embody today’s definition of core investing and what allows them to deliver attractive, risk-adjusted returns?
JL: We can point to several sectors that have moved furthest along the path to institutional acceptance. Senior housing is one of the highest conviction sectors for our investors today. The metrics point to a very strong outlook, with demand being driven by the continued growth of the 80-plus population.
The medical office sector is experiencing continued high occupancy due to growing healthcare demands and structural shifts toward outpatient care. At the same time, supply remains constrained by high construction costs, labor shortages and land scarcity. Student housing is also enjoying a period of exceptional performance, primarily driven by strong enrollment growth at selective public universities. Data centers, of course, are experiencing exceptional demand through AI-adoption and other secular trends along with major supply constraints, particularly access to power and land. Self-storage saw a significant increase in demand during the covid pandemic. After a period of slower revenue growth, the sector is now experiencing increased demand on a selective basis.
As a larger percentage of transaction volumes in these sectors portray core characteristics, we are also seeing a greater opportunity for core real estate lending to deliver attractive risk-adjusted performance across alternative real estate.
