Real estate markets are shifting from a risk-on approach at a perceived market bottom to caution, as participants evaluate the impact of tariffs and other US policy changes. We are effectively entering a new cycle. The previous cycle ended with volume recovering, reasonable fundamentals, some elevated carrying values, many balance sheets still over-leveraged, and a rising pace of workouts.

Now, amid near-record-low consumer confidence, expectations of slower growth and increased inflation are growing globally, particularly in the US. Most central banks had shifted toward easing, but inflation may challenge that approach. Long-term interest rates remain near historical averages, having recovered from the extreme lows of the COVID period. Volatility is elevated and may persist until new policies and their implications become clearer.

Periods of market turmoil call for a return to fundamentals. In real estate, this means focusing on income, identifying opportunities, and ensuring thoughtful portfolio diversification.

Real estate is attractive for its durable income characteristics and its potential role in inflation protection. In the near term, emphasizing strategies with in-place income provides downside protection. Over the longer term, rising replacement costs have already slowed supply growth, and new supply may be further delayed by inflation, potentially extending periods of rent growth.
More durable income sources are likely to be found in residential and necessity-driven properties. The hotel sector is facing challenges, while retail and office properties remain vulnerable to economic downturns. Shifts in demand may introduce risks for industrial assets. Data centers remain an interesting sector, though DeepSeek has slowed activity in this previously white-hot market.
Opportunities for attractive entry points exist, and new stresses may exacerbate balance sheet challenges, creating ongoing distress-related opportunities.
The impact of evolving US government policies on investments is difficult to predict, making diversification a prudent strategy for managing risk.
StepStone Real Estate’s House Views are developed through a combination of macroeconomic, demographic, and geopolitical analysis conducted by our market research team, alongside the on-the-ground insights of our investment team. Our investment team’s perspectives are shaped by our experience allocating approximately $17 billion per year of our clients’ and investors’ capital into real estate funds, secondaries, recapitalizations, and co-investments, as well as insights gained from over 1,000 meetings with real estate GPs in 2024.

Our team is available at your request for one-on-one discussions about our market research and perspectives.

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