StepStone Real Estate Spring 2026 House Views

Current real estate pricing seems to be near the bottom of the cycle, creating a compelling entry point for investment. There is dislocation and pressure to sell certain assets. While macro uncertainty is high, we are cautiously optimistic about property fundamentals.

• Preferred strategies include:
• Quality assets with in-place, durable income
• Core+ and value-add strategies for income with upside
• Recapitalization and distress buying opportunities for outsized return potential (still leaning core+ and value-add)
• Debt strategies for income and defensive posturing

In this environment, it’s important to remember that real estate may provide significant benefits to investment portfolios. Historically, it has provided useful protection from inflationary shocks. We believe that its low correlation with the equity markets means it may deliver meaningful diversification.

Challenges related to the 2022 rise in interest rates remain.

• Balance sheets are over levered. Maturing loans have been deferred instead of resolved to the point that this year’s US loan maturity volume has doubled from its original level due to prior maturities that have been extended.
• Carrying values in the average fund do not fully reflect price declines in the property trading market. This means realizations trigger sizeable losses, and GPs of closed ended funds are holding many assets purchased in a lower rate environment in the hopes they can recover value.
• The result is that 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 more than 50% below normal. In an environment where ‘DPI is the new IRR’, this is keeping the lid on fundraising.
• The mountain of dry powder that accumulated in peak fundraising years is finally getting put to work. It dropped from over $500B in 2022 to around $380B now. Half of what remains is at the end of its investment period so there is pressure to invest.
• Among open-ended funds, high marks are likely to extend the stretch of disappointing returns. With many open-ended funds still frozen with overvalued assets and exit queues, core funds aren’t in the market, opening up opportunities for other investors.

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, which is really a return to normal. The current macro environment means the outlook for the various property types on average is increasingly similar. This masks many local differences in expected performance, so asset and manager selection is critical.

• Even the downside case among forecasters points to positive income growth across nearly all property types.
• Over the longer term, high replacement costs will slow or delay new supply growth. This should expand the window of opportunity for rent growth in coming years, even amid softer demand. Supply pressures vary by sector, market and submarket.
• Certain sectors are still likely to outperform, with more durable income expected in residential and necessity-driven properties (grocery, medical office, senior). There is a 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.
• Macro themes reinforce performance dispersion:
  • AI adoption is still in its early stages, and much remains unknown. But the technology is likely to boost tech hubs, data centers and higher income households, while raising risks for the office sector broadly and workers in roles that can be easily automated.
  • The Iran war has driven energy prices up sharply, which leaves energy importers (Europe, UK, APAC) at greater risk broadly. Needs-based sectors are likely to outperform property sectors relying on discretionary spending and those sensitive to higher transportation costs.
  • The energy shock also reinforces the K shaped economy, which refers to the growing wealth divide in the US and Europe. This has implications for certain property sectors and sub-sectors (e.g. luxury hotels will continue to outperform economy) and demographic cohorts.

But again, granularity is key, with performance likely to vary significantly by property type and sub-segment, and 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.