Over the next decade, the emergence of niche property types, coupled with next-generation leaders accelerating nontraditional portfolio construction decisions, is expected to result in fundamental shifts in real estate investment. 

Traditionally, commercial real estate (CRE) owners and investors built a portfolio of properties by selecting from a wide array of high-quality assets defined within four core property types: office, industrial, retail, and apartment. Having a diversified portfolio of these core assets provided consistent income from rental growth, sustained value appreciation, and minimal variability in performance. This approach was generally enough to meet investor objectives and even outperform other financial assets like equities or treasuries, when adjusting for risk.

Not anymore. The emergence of alternative property sectors has begun to topple long-established pillars for CRE portfolio construction. At the same time, more of the industry’s top decision-makers are approaching retirement, challenging the next generation of leaders on ways to prepare to adapt from conventional strategies.

Over the next decade, the emergence of niche property types, coupled with next-generation leaders accelerating nontraditional portfolio construction decisions, is expected to result in fundamental shifts in real estate investment. The Deloitte Center for Financial Services predicts that by 2034, the value of alternative properties will grow at a 15% compound annual growth rate (CAGR) to account for nearly 70% of industry portfolio values, an increase from just over 40% today.

The shift toward alternatives is already underway

Alternative property types—data centers, cell towers, life sciences, health care, self-storage facilities, single family rentals, senior housing, and student housing, among others—are pushing some real estate leaders to realign their long-held portfolio construction proclivities. Alternatives have grown at a 10% CAGR, from US$67 billion in 2000 to more than US$600 billion by 2024. Alternatives have also outperformed traditional properties over the past decade, achieving 11.6% annualized returns compared to 6.2% for traditional property types.

Public real estate investment trusts (REITs) have spearheaded the adoption of alternatives, enabling access to a wide range of real estate assets, while the private real estate market has approached allocations with more caution. REITs have increased their allocation to alternatives in the public markets, rising from 26% in 2000 to over 50% in 2024. Meanwhile, the original NCREIF Fund Index—Open End Diversified Core Equity (ODCE), an index of 25 private funds—did respond to the growing demand for some alternative types following the pandemic by adding these asset classes to the index, but core property types still make up more than 90% of the total value.

In the current environment of elevated interest rates and vacancies, some properties within core sectors are facing structural challenges. With capital locked up in aging assets facing value erosion, some investors could pivot to alternatives. Some private funds that have substantial capital reserves are acquiring existing REITs, their underlying assets, and operating platforms. In 2022, American Campus Communities became the last of the four US public student housing companies to be taken private. This follows the previous acquisitions of EdR by Greystar, Campus Crest by Harrison Street, and GMH Communities by American Campus Communities.

Meanwhile, advances in technology, demographic shifts, and housing affordability could make alternatives a long-term, durable asset class. Artificial intelligence and 5G innovations are spurring investor interest in data centers and cell towers. In the United States, the 75 age group will grow to 40 million by 2040 which underpins an expected demand for senior housing facilities and life sciences properties. Meanwhile, a persistent lack of affordable housing has boosted consumer interest in self-storage and institutional-grade manufactured housing.

The next generation should bring different philosophies

In Deloitte’s 2025 commercial real estate outlook survey, which polled C-suite real estate leaders and their direct reports, we asked which property sectors could present the greatest opportunity going forward. Respondents who were 40 or younger selected alternative property types nearly 10% more frequently than respondents over 40. Since nearly 60% of industry leaders are expected to hit the age of retirement within the next decade, an influx of next-generation leaders will be stepping into these roles. This could accelerate the shift toward alternatives.

However, it will likely take time to reallocate capital across portfolios from core properties to alternatives. Currently, elevated interest rates and uncertainties in the global economy have made shifts in portfolio strategy more difficult to execute. Should conditions around real estate dealmaking, lending, and fundamentals continue to improve—as predicted by nearly 90% of global real estate leaders for 2025—reallocation opportunities could arise as the next wave of leaders in real estate prepares to take charge.

Recent investor patterns point toward a couple of key subsectors within alternatives as potential drivers of growth. Through the end of 2024, active managers were most frequently reallocating funds toward the digital economy, including data centers and telecommunications, and health care sectors. In the 2025 commercial real estate outlook survey, digital economy properties were ranked second as the asset class with the greatest opportunity for investment and ownership through 2025.

Navigating the shift toward alternative properties

As owners and investors pivot their portfolios toward emerging sectors, they could consider focusing on:

First, active management and experienced partnerships. Investors should be aware of operational, regulatory, and industry-specific nuances to managing these property types. Partnerships like joint ventures could be an inroad that may enable less experienced partners for certain asset classes, with available capital, to collaborate with experts who have specialized knowledge.

Second, regional supply and demand gaps. Regional differences could impact availability. Some areas may lack assets; others may face regulatory hurdles. Energy availability and energy costs can be key factors, especially for properties like data centers.

Third, alignment with broader strategic goals. Alternative sectors have offered significant yields lately. But investors may consider choosing allocation strategies based on their long-term potential.

Fourth, balancing alternatives with core property types. A shift to alternatives does not mean ditching core assets entirely. Having a diversified balance of core and alternatives could help mitigate potential volatility risks.

Alternative property types are relatively immature assets compared with the behemoth core sectors that have driven traditional commercial real estate ownership. It will likely take a collaborative effort among partners, leaders, and the next generation to bring these alternatives to the mainstream.