Thematic investing in real estate: Global macro-forces complicating the investment calculus
- July 1, 2023: Vol. 10, Number 7

Thematic investing in real estate: Global macro-forces complicating the investment calculus

by Sheila Hopkins

For decades, investors and managers divided investments among real estate’s four food groups — office, retail, industrial and multifamily. It was easy and clean. Everyone understood what was being discussed.

But times have changed. Global societies and economies are being shaped by powerful megatrends, from climate change and environmental sustainability to health and wellness. These shifts create compelling opportunities that thematic strategies can capitalize on by investing in assets that are well positioned to benefit from the structural changes underlying the theme.

Instead of sectors, real estate is now more likely to be discussed based on themes, such as decarbonization, smart cities, the future of work, digital communications and life sciences, among others. That doesn’t mean that sectors have become passé. On the contrary, they have become more important than ever as managers dive into sector characteristics to match the best sector with future needs.

But they have become more nuanced and more complicated. It’s similar to dividing literal food groups among various cuisines. People are still eating vegetables, grains and proteins, but how they are prepared and how they taste depends on whether the dish is Thai, Tex-Mex, German or Cajun.

In the same way, an office building or retail asset might perform very differently depending on the theme it is matched with. Is it being used to take advantage of a decarbonization theme, a smart city theme or maybe a work transition theme? Each would involve different management, goals and outcomes.


Thematic strategies are based on the premise that specific themes should outperform the overall market over time, and that exposure to these themes could generate attractive long-term return potential. Instead of focusing on sectors or regions, thematic strategies follow ideas and may cut across real estate sectors and even include other asset classes. For example, a life sciences building would take advantage of not only the real estate market, but the growth in medical research.

“Thematic investment seeks to harness the power of ingenuity,” explains David Docherty, investment director, thematics, at Schroders. “This ingenuity drives innovation and results in imbalances in the world. These imbalances might be between populations and resources, such as climate change, or they might be within individual markets, where disrupters can come in and turn a whole industry upside down. So, it is the relationship between ingenuity, innovation and imbalances that creates powerful investment themes.”

Using themes to drive investment comes with several benefits to real estate investors. First of all, thematic investing allows investors to diversify their real estate portfolios beyond traditional property types. By embracing emerging themes, investors can gain exposure to new sectors and asset classes that may have a low correlation with the broader market.

Thematic investing also targets trends with long-term growth potential. By identifying themes that are expected to endure and gain momentum, investors can position themselves to benefit from the appreciation of properties associated with these trends.

Thirdly, thematic investing can help mitigate risks associated with short-term market fluctuations. Investing in themes that are driven by fundamental societal shifts or megatrends can provide a level of stability to real estate portfolios, even during economic downturns.


So, what themes are driving current real estate investment? Accessing opportunities that support the drive to decarbonization is on everyone’s to-do list, but there is a wide range of other themes trending worldwide.

“In addition to themes like climate change and disruption, there are many compelling themes at work today,” says Docherty. “There is the transition from fossil fuel to clean energy. There is urbanization. We estimate close to 70 percent of the population will live in cities by 2050. And then there is the myriad of changes we are seeing in industries such as manufacturing, healthcare and the consumption patterns that define our daily lives.”

Themes also cover trends involving food and water supplies, access to communications and the digital revolution. Many of the most attractive themes fit into five broad categories.


Urbanization and population growth focuses on investing in real estate located in rapidly growing urban areas or regions experiencing significant population growth. As more people move to cities and urban centers, there is an increased demand for housing, commercial properties and infrastructure development.

“We are currently focusing on multifamily housing opportunities in emerging cities,” says Kunal Merchant, partner and COO at Revitate. “Production or preservation of housing responds directly to a significant nationwide housing shortage, offering immediate and long-term economic and social benefits. We have a strong preference toward investing in what we call ‘underdog communities.’ These are historically overlooked and undercapitalized communities, that upon closer look, present compelling stories in terms of population growth, job growth and overall economic potential.”

Several government programs, including opportunity zone legislation, have encouraged managers and investors to revitalize urban areas in anticipation of demographic shifts.

“The federal opportunity zone policy enacted in 2017 has brought new energy and attention to markets across the country that weren’t typically considered by traditional private capital,” continues Merchant. “But with greater light shined on these communities, a compelling story for growth and investment potential has emerged. The growth metrics are there — notably, 68 percent of the largest urban counties in the U.S. [defined as counties with a population of 250,000 and above] have recently experienced population losses to secondary markets. Companies are continuing to relocate to these markets, while the cost of living and land prices remain relatively affordable.”


Sustainable and green investing is on everyone’s mind. Sustainable investing includes properties with energy-efficient features, renewable energy installations, green building certifications and sustainable infrastructure. This theme aligns with the growing global focus on sustainability and can offer long-term value and potential cost savings. Tenants often demand green features, yet they are also cost conscious, requiring developers to balance the two demands.

“Identifying areas that have demand but are undersupplied in apartments is a key driver for real estate investors,” says Larry Jacobson, president and CEO, Jacobson Equities. “Once that location has been identified, it will come down to issues of what will attract and keep those tenants. While building green buildings is a desirable objective, for the investor who is providing capital, it is a question of whether that building will attract a tenant who will pay extra for its green status. The reality is that renters are price sensitive — even at the luxury end of the market — so any trend/theme in development or amenity must be delivered within the scope of what the target renter is willing to pay.”


With advancements in technology, investing in real estate that incorporates smart features and supports technological innovation and smart cities has gained traction. This theme includes properties equipped with smart home systems, integrated IoT (Internet of Things) infrastructure, and proximity to technology hubs. Investing in real estate that supports smart city initiatives, such as smart buildings or integrated transport systems, could offer significant long-term returns.

“Technological advancements are gaining speed in their implementation,” says Derek Graham, principal and founder at Odyssey Properties Group. “The real estate industry is undergoing a digital transformation, albeit at a slower pace than other industries. Technology is playing a vital role in streamlining operations, improving efficiency and enhancing tenant experiences. Investors are embracing innovations such as AI-powered predictive analytics, and technologies like smart home systems, virtual property tours, and automated property management systems. Technology is becoming integral to the industry, enabling investors to stay competitive and provide modern solutions to tenants.”

Another strong trend involves investing in real estate that caters to changing demographics, particularly the aging population. Properties that offer senior housing, assisted-living facilities or healthcare facilities are in demand as the population ages. This theme also includes properties in areas with high demand for affordable housing or rental properties.

“The strategy in the U.S. is to look at cities with good quality of life, where the population and employment rates are growing, such as Dallas, Denver and Nashville,” says Jacobson. “Overall, Texas is experiencing substantial migration from other U.S. states as a result of their low business and personal taxes, making it a desirable location for businesses. We’re leaving markets that have these trends in reverse — more crime, higher taxes and population drain, such as Seattle.”


Finally, ecommerce and logistics, which experienced a hurricane-like tailwind during the pandemic, continue to provide opportunities. This theme encompasses warehouses, distribution centers and last-mile delivery facilities located strategically to meet the demands of online retailers and enhance supply-chain efficiency.

“The rise of ecommerce and the increasing need for supply-chain resiliency has fundamentally shifted long-term tenant demand for industrial properties,” says Ben Harris, executive vice president, investor relations, for CRG. “Specifically, the major beneficiaries are well-located, functional logistics facilities that serve high-density population centers, critical port markets and primary logistics corridors. We also recognize that technological advancements, such as robotics, automation and AI in supply-chain operations, are affecting the layout and specifications required in modern warehouses.”


Themes by definition are large, global and overarching. But a few smaller, but no less important, themes have emerged that might make an even larger impact on winning the day-to-day investing game. These themes primarily impact the cost of executing deals, whether those focused on clean energy or those focused on providing housing for a country with a several million housing unit shortage (estimates range from 1.7 million to 7.3 million).

“Geographical concerns and natural disasters are becoming a significant factor influencing investment decisions,” says Graham. “Insurance cost volatility in states like Florida, California and Texas have raised concerns among investors. These factors will likely affect how deals are evaluated and underwritten for the long term, and investors will need to exercise caution when assessing potential investments in these regions.”

And, of course, in this era of rising interest rates, the cost of financing can’t be overlooked.

“Interest rates are going to drive much of the investment story moving forward,” claims Jacobson. “The zero-interest rate environment is over, and a lot of deals that looked good in that period are going to sour. The cost of capital and availability will impact decisions. In addition, skyrocketing insurance costs, [property and liability], are making it increasingly difficult to underwrite deals. Deals that once would pencil, won’t anymore. The cost of debt and the amount of equity needed will determine the returns, and investors will be comparing these new levels of returns to alternatives, including lower-risk alternatives that may generate lower returns. Where interest rates net out in the coming 12-24 months will dictate investing behavior.”


Thematic investing revolves around identifying long-term trends, societal shifts or disruptive forces that have the potential to reshape industries and economies. It is a strategy that seeks to capture the opportunities created by these trends by investing in companies or assets that are poised to benefit from them. In the context of real estate, thematic investing focuses on themes that are expected to influence property values, rental demand and the overall market dynamics.


Sheila Hopkins is a freelance writer in Auburn, Ala.

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