In the world of commercial real estate, multifamily, office, retail, and industrial properties typically dominate headlines. However, as we navigate a higher-for-longer interest rate environment, savvy real estate investment firms are increasingly turning toward alternative CRE asset classes capable of delivering robust returns despite challenging market conditions. This article explores two niche asset classes that deserve your attention in 2025: data centers and build-to-rent single-family homes.
Both sectors are experiencing extraordinary growth and attracting significant institutional investment, presenting unique opportunities for commercial real estate GPs looking beyond traditional property types.
Data Centers: Riding the AI Revolution
Data centers have emerged as one of commercial real estate’s fastest-growing CRE asset classes. According to Avison Young, Q4 2024 saw U.S. colocation data center inventory grow by an astonishing 47.5% year-over-year. This explosive growth has coincided with vacancy rates plummeting to a historic low of just 1.6%. The supply-demand imbalance has created a perfect storm for rental rate growth. Wholesale data center rents have surged between 30-44% since 2021, with net absorption in Q4 2024 exceeding previous-year figures by over 15%. Certain markets demonstrate just how tight conditions have become:
- Salt Lake City
- Northern Virginia
- Portland, Oregon
All these markets recorded vacancy rates below 0.5% in Q4 2023.
Tech Giants Fueling Expansion
The primary demand drivers? Tech giants focused on artificial intelligence infrastructure. Microsoft, Meta, Google, and Amazon collectively invested $18 billion in AI data centers in 2024 alone. Microsoft recently announced plans to double its AI data center spending to $80 billion in 2025. Since ChatGPT’s launch in November 2022, U.S. private data center construction spending has nearly tripled.
While investment sales volume has declined across most commercial real estate sectors in the past three years, data centers have achieved record-breaking transaction activity. Data center M&A deals reached $73 billion in 2024, surpassing the previous record of $53 billion set in 2022 by more than 40%. With institutional investors like Blackstone making substantial commitments to the sector, data centers represent one of commercial real estate’s most dynamic opportunities for the foreseeable future.
Build-to-Rent: Meeting an Affordability Crisis
The U.S. housing market has undergone a dramatic transformation since 2020. Average national home values have jumped by over 43% since April 2020, while mortgage rates have more than doubled since early 2022, creating an affordability crisis for many Americans. To illustrate this shift:
- April 2020: Average home value of $247,400 with a 3.5% interest rate equaled an $889 monthly mortgage payment
- Today: Average home value of $354,700 with a 7% interest rate creates a $1,888 monthly mortgage payment
This $1,000 monthly increase means borrowers need approximately $33,000 more in annual income to qualify for the same house. The situation is even more extreme in major metropolitan areas where employment opportunities are concentrated. In San Francisco, for example, a 20% down payment now requires nearly $250,000 in cash before accounting for closing costs or furnishings. Monthly mortgage payments can exceed $6,600, and when factoring in property taxes and insurance in a challenging insurance market, annual housing costs can approach six figures.
Institutional Investment Flows In
This affordability crisis has coincided with demographic shifts as millennials start families and seek more space than traditional apartments offer. Build-to-rent single-family homes provide an attractive alternative. According to John Burns Research and Consulting, almost 10% of U.S. homes that broke ground in 2024 were specifically built as rental units. The sector has attracted $57 billion in investment during 2021-2022, with projects now being delivered at a record pace. More than 12,000 rental homes have been built nationwide since 2017, with a record 34,000 units delivered in 2024 alone.
The rental proposition is compelling. Renting is approximately 27% cheaper than buying in the 50 largest U.S. metros, according to Bankrate data. CBRE estimates the gap may be even wider, with average monthly mortgage payments for newly purchased homes running 52% higher than average monthly rent payments in Q2 2024. In markets like Los Angeles, Austin, Seattle, and San Diego, the average monthly mortgage payment exceeds 2.5 times the average monthly rent.
Room to Grow
Major private equity firms recognize the opportunity. Blackstone acquired Tricon Residential for $3.5 billion in early 2024, while Prom Partners raised nearly $1 billion to acquire single-family rental properties. Despite this institutional interest, less than 2% of the single-family rental market is institutionally owned today, suggesting substantial room for growth. For investors who believe in continued home price appreciation and U.S. population growth, this emerging sector offers compelling long-term potential.
Additionally, build-to-rent communities—which feature clusters of single-family rental homes with community amenities—are gaining traction. These communities blend elements of traditional multifamily living with the benefits of single-family homes, providing an attractive bridge for multifamily home syndicators hesitant to move fully into single-family home investments.
Looking Ahead
As traditional commercial real estate sectors face pricing pressures and interest rate challenges, these alternative CRE asset classes present unique opportunities for forward-thinking GPs and managing partners. Both data centers and build-to-rent single-family homes address fundamental market needs while demonstrating resilience in the current economic environment.
For those seeking to diversify their investment portfolios or identify growth opportunities in an otherwise challenging market, these niche sectors warrant serious consideration as we move into 2025 and beyond. The continued evolution of technology, changing demographic preferences, and persistent housing affordability challenges suggest that both sectors will remain attractive investment targets for years to come, even as traditional commercial real estate struggles to adapt to the new normal of higher interest rates.
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