Institutional investors, including pension funds, are stepping outside the box, beyond the core asset types of office, industrial, retail and apartments, to consider a growing menu of alternative real estate options.

Alternative property types have already exploded in the publicly traded market. About 40 percent of the market cap of REITs is now held in non-traditional property sectors, including self-storage, student housing and resorts, says Greg MacKinnon, , director of research at the Pension Real Estate Association (PREA) in Hartford, Conn. “It is just now starting to slowly get a grip in the private market as well,” says MacKinnon.

There has been a noticeable spike in pension fund interest in non-traditional property types over the past few years. “How much that interest is translating into actual increased investment is still up in the air a little bit,” MacKinnon notes.

There is a secular shift occurring in the broader commercial real estate sector with property types that were once viewed as “alternative” that are now moving more into the mainstream as accepted institutional caliber assets. Hospitality, seniors housing and student housing are among the former outliers that are now big targets for institutional investors. And investors are continuing to push the boundaries of “traditional” investments to include a wide range of options, including single-family rentals, data centers, workforce housing, land, timber, golf courses and prisons. “There are all kinds of interesting ways now to build a portfolio for investors than there was a decade ago,” says Burl East, CEO of American Assets Capital Advisors, an investment management firm specializing in real estate securities.

Chief among the factors fueling that demand for alternative real estate is a desire to capture higher returns. There is a bigger hunt for yield as returns for trophy assets located in the top 10 markets in the U.S. have declined, says James Martha, portfolio manager for multifamily strategies at TH Real Estate, a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA). “Alternatives present that opportunity for generating alpha (returns) in a diversified real estate portfolio, and at this point in the cycle, there is certainly increasing demand,” he says.

TH Real Estate invests in both workforce housing and purpose-built student housing as part of its multifamily investing strategy. Recent acquisitions include BLVD63, a 1,379-bed class-A student housing property near the San Diego State University campus. “Housing has been on a pretty strong run since 2010, but there has been bigger segmentation of housing interests to seniors housing, student housing and workforce housing over the last two to three years,” says Martha.

Alternative assets can also be a good diversification play for real estate portfolios and a way to balance portfolios with properties that are non-cyclical or not-correlated with shifts in the economy, adds East. American Assets Capital Advisors manages the Altegris/AACA Opportunistic Real Estate Fund (RAAAX). The fund currently has net assets valued at $116.2 million, with holdings that focus on companies and REITs that invest in properties including resorts, data centers, manufactured home and RV retirement communities and cell phone towers.

The underlying cash flow for buying a data center or a resort is backed by a single tenant that rarely leaves. There also tends to be less buyer competition for non-traditional assets, which can help investors achieve higher cap rates and better yields, says East.

To some extent, institutional investors are following in the footsteps of peers such as the Blackstone Group that are finding success with alternative assets. “Generally, what happens in these situations is that they hear that one of their brethren in the investment community has done well in an alternative asset, and that will motivate them to expand their scope a little bit,” says John R. Williams, president and chief investment officer at Avanath Capital Management.

Avanath Capital Management is an institutional real estate fund manager that invests in affordable and workforce housing on behalf of institutional investors such as pension funds and life insurance companies. Since launching its first fund in 2010, Avanath Capital has seen fundraising steadily accelerate in both size and time to close. Its first fund was viewed as highly successful, with $120 million raised over two years, while its second fund closed in 2014 and raised $200 million in about 14 months. The company is currently in the midst of raising capital for its latest fund.

Despite the ongoing evolution of real estate alternatives, many pension funds are still on the learning curve when it comes to exploring new types of assets and they are proceeding with caution. Pension funds are very interested, and some have already dipped a toe in the water with new investments, says MacKinnon. “But a lot of investors are still trying to learn the basics before they commit capital,” he says.

Some pension funds are wary of the lack of data on cyclical performance with some alternatives. As such, they are searching for experts, teams and track records in these alternatives before they’re investing, adds Martha. “Ultimately, alternatives are a sexy thing to talk about today, because we have seen a shift in demand. But I do think that is not without caution,” he says.