StepStone Real Estate Fall 2025 House Views

Momentum is building across real estate markets, with US transaction volume back at long term norms and capital calls running 21% above normal for non-core funds for the third quarter of 2025. This was driven by lower rates, healthy lending markets, and mounting pressures from buyers and sellers to deploy capital commitments and return capital to investors. 

Prices are around cycle troughs, and balance sheet challenges remain significant, so there is opportunity for investors plus growing pressure to recapitalize or sell assets.

• Accumulating loan deferrals mean this year’s US loan maturity volume is twice normal levels. Banks are showing signs of running out of patience three years after the rate rise. Growing bank M&A activity will lead to more resolutions.    
• Non-core funds are sitting on $1 trillion in unrealized assets that have been held for over 5-years —not good for IRR—and distributions are still running 60% below normal. In an environment where ‘DPI is the new IRR,’ there is growing acceptance by GPs that unrealized assets impair fundraising.
• The mountain of dry powder that accumulated in peak fundraising years is getting put to work. It dropped from over $500 billion in 2022 to just under $300 billion now, and half of what remains is at the end of its investment period. New fundraising remains depressed. 
• To date, resolution of problems this cycle has been slower than the post GFC era, with multiple factors at work including relatively healthy property market and macroeconomic fundamentals (especially higher interest rates), and a wealth of rescue capital, which has helped to forestall fire sales. 

The global economy has proven resilient in the face of significant policy uncertainty that is likely to continue, with a base case of slower growth rather than actual recession in most places. This has kept fundamentals in decent shape.

With little change expected in longer term interest rates and limited capacity for cap rate compression, income will be the key driver of real estate returns.  

• Over the longer term, high replacement costs will delay new supply growth, which should expand the window of opportunity for rent growth in coming years.
• Certain sectors are likely to outperform, with more durable income expected in residential and necessity-driven properties (grocery, medical office, senior), and greater risk of underperformance in some of the more cyclical sectors, including hotel, industrial, and office. That said, there is tremendous variation by location and property sub-type. 
• Certain markets also look better than others:
  • In the US, economic growth is strongest across the sunbelt, but many of these markets also have less supply constraints, which adds risk and makes it harder to grow income. Supply constraints help major metros like New York and Boston maintain their appeal despite slower economic growth. San Francisco is recovering because it is leading AI development, which also represents a wildcard that can change demand globally.  
  • In Europe, central and northern cities plus the Iberian peninsula have the strongest outlooks for economic growth. Here, supply constraints tend to dominate outcomes, so there is less correlation between growth and income appeal. Slower growing cities such as London can have better outlooks for income growth.      
     

All that being said, this is a bottom up, granular market opportunity, and no longer a time to just fill the bucket with the flavor of the month. The potential for healthy income growth will vary significantly by property type and sub-segment, with differences by market, neighborhood, and even at the asset level. It is a time to lean into proven managers with the ability to identify, access and manage the right properties, and find the opportunity in the turmoil.

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 nearly 900 meetings with real estate GPs YTD.

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