With the rise of multifamily investments in recent years, many real estate investors have focused their attention on acquiring multifamily properties. However, limiting investment to only multifamily may lead to missed opportunities in commercial real estate. By taking a broader approach and investing beyond multifamily, investors can build a more diverse and resilient portfolio. There are several compelling reasons why investors should consider expanding into other commercial asset classes such as office, retail, industrial, hospitality and self storage. Diversification is a fundamental investing principle that can help mitigate risk. Different commercial property types have unique demand drivers, lease terms, capital requirements and risk profiles. Allocating capital across multiple sectors provides exposure to varied market fundamentals. Investing beyond multifamily also allows tapping into new demographic and socioeconomic trends. For example, the growth of e-commerce has fueled demand for modern logistics facilities. Healthcare real estate has tailwinds from the aging population. Adding these and other alternative asset types provides differentiated exposure compared to concentrating solely in apartments. Investors with a multifamily-heavy portfolio could improve their cash flow stability by incorporating assets with longer lease terms. Office and industrial properties typically have 3-5 year initial lease terms versus 1 year for apartments. The longer contractual revenue provides a hedge against turnover volatility. Commercial properties also offer a path to higher yields, supported by price appreciation. Cap rates for alternatives such as self storage are 100-200 basis points higher than multifamily in many markets. Prudent investors looking to invest beyond multifamily should start by determining target allocation to new sectors based on risk preferences, return objectives and portfolio construction goals. They can then tactically build exposure over time as compelling opportunities arise.
Diversification mitigates risk concentration in multifamily investing
By investing solely in multifamily housing, investors concentrate their portfolio risk on one sector’s supply-demand dynamics. Adding commercial real estate diversifies exposure across multiple property types that perform differently through economic cycles. For example, multifamily and office space tend to move in the same direction, while retail and industrial can zig when other sectors zag. Blending allocations taps into varied demand drivers such as demographics, consumer spending, business investment and trade flows. If one sector suffers a downturn, others may hold up better and offset the weakness. Diversification essentially involves choosing investments that don’t move in perfect lockstep, thereby improving the portfolio’s stability and reducing risk-adjusted returns. Investing beyond multifamily also mitigates geographic concentration. Focusing on one region or metro amplifies vulnerability to local shocks and volatility. Expanding into new markets spreads exposure more evenly across different supply-demand dynamics nationally.
Alternative commercial assets can tap evolving societal and economic trends
The economy evolves over time, fueling changes in commercial real estate demand. Investors who recognize emerging opportunities early can capitalize on secular shifts. For example, surging e-commerce volumes have driven strong appetite for modern logistics and warehouse facilities located near urban population centers. Amazon’s impact on retail has also fueled redevelopment of antiquated malls into mixed-use properties. Demographic changes influence demand too. Millennials coming of age fueled multifamily demand over the last decade. But as they form families, single-family rentals emerged as a new institutional asset class. Meanwhile, aging baby boomers will spur more healthcare and senior housing development. Changes in the workforce also shape commercial real estate needs. The shift to flexible office space and co-working caters to startups and the gig economy. Savvy investors look for assets poised to benefit from long-term demand tailwinds driven by an adapting society.
Alternative assets provide differentiated cash flow and inflation protection
Another benefit of investing beyond multifamily is tapping cash flow streams that behave differently over time. The short 1-year lease terms common in apartments means turnover and vacancy risk is constantly on the horizon. Tenants move out every year. Office, industrial and net lease retail assets typically have 3-5 year initial terms, plus options. The longer contractual revenue boosts durability and visibility of cash flows. Self storage features month-to-month terms, but sustained occupancy plus ancillary revenue offers stability. The varying lease structures across property types provides differentiated protection against inflation too. Multifamily landlords can adjust rents quickly when prices rise, passing higher costs through to tenants. But commercial leases often have annual escalation clauses that ensure rents keep pace with inflation, avoiding the need to wait for renewals.
Higher yields available in self storage, hotels and other alternatives
In addition to portfolio diversification and cash flow stability, investing beyond multifamily offers the potential for higher yields. Cap rates for multifamily have compressed significantly as capital flooded the sector. Investors pivoting to alternatives often find first-year yields 100-200 basis points higher in sectors like self storage, hospitality, senior housing and medical office. Sophisticated investors can capitalize by allocating to higher cap rate deals while maintaining discipline on cost of capital and asset quality. However, higher yields in alternatives come with different management intensity and expertise required. Hotels and senior housing, for example, operate more like a business than simple rental housing. Investors new to alternatives should account for the operational learning curve. But adding options like self storage, student housing, single-family rentals and data centers can enhance returns for those willing to move beyond multifamily.
By taking a broader approach beyond multifamily, real estate investors can build a more diverse and resilient portfolio positioned to capture opportunities in evolving commercial real estate markets. Allocating to alternatives such as office, retail, industrial, self storage and hospitality mitigates risk concentrations, taps into specialized property niches and provides access to higher yields.