More Nuanced Investing as the Next Upcycle Begins
We see compelling investment opportunities from a volatile and asynchronous macro and capital markets environment. We believe real estate returns are likely to turn positive following two negative years, boosted by stable or lower yields and net operating income (NOI) growth. Wider performance dispersion between "haves" and "have nots" is likely as occupier and investor preferences further narrow.
What we are seeing
As the global macro-economic environment continues to improve, the case for real estate investing has become more compelling. After a period of moderation and stabilization in 2024, we believe that 2025 will see a transition into the next upcycle. Inflation is trending down, interest rates are falling, and valuations are troughing. Equity markets, including public real estate investment trusts (REITs), are up materially over the last two years, yet private real estate valuations have been recovering slowly. Occupier demand remains uneven within and across all real estate sectors impacted by the economic cycle and longer-term structural trends.
Supply levels in most markets and sectors will be lower due to a pullback in construction starts because of elevated costs, expensive debt financing and lower sale prices. Transaction activity is increasing due to a more constructive market outlook and greater availability of debt financing. Selective situations with ongoing seller pressure to deleverage should create interesting opportunities to deploy capital into recapitalizations and structured credit investments.
What we are doing
We will look to capitalize on e-commerce sales growth and acquire or develop core industrial assets in supply-constrained, high-growth markets as well as seek opportunities to take leasing and repositioning risk in urban infill assets
We will continue to invest in high-quality senior housing assets at attractive yields with operational upside. We will evaluate hotel investments that provide attractive initial yield and the opportunity to drive performance through asset management. We are looking at opportunities to acquire assets from—or provide capital solutions to—public companies, funds, and private owners in need of liquidity. We are pursuing high-quality assets that meet the narrower definition of "core" being adopted by occupiers and investors.
We are also seeking to leverage our asset management expertise to drive income growth including environmental, social and governance (ESG) retrofit opportunities to optimize energy efficiencies. We will invest accretively into our existing assets and deploy capital into our core operating platforms such as residential, self-storage and student housing.
We are executing sale leaseback transactions with occupiers given their relative attractiveness as an alternative source of financing and evaluating opportunities to acquire long-term leased assets benefiting from secular and demographic tailwinds.
What we are watching
We are monitoring geopolitical, economic, inflation and interest-rate signals. We are on the lookout for signs of distress or forced selling from pending debt maturities. We have our eyes on global dislocation, demographic shifts, supply chain reconfigurations and divergent recovery cycles by region, market and sector. We are observing shifts in structural demand drivers and how they impact occupier preferences, such as on-shoring/near-shoring, ESG, artificial intelligence and aging populations. We are paying close attention to investor sentiment, allocation trends and strategy preferences.
1 Urban infill assets are vacant or underutilized parcels of land in urban areas that are developed for construction.
