Real Estate Bottomed Out In 2024. The Next Cycle Will Be Hard, But Rewards Could Be Huge
With the new year comes the start of a new real estate cycle.
There are potentially stellar returns to be made over the next few years — if investors buy right. For the sector as a whole, it will be a period like few working in the market today have experienced in their careers.
“This is not a V-shaped recovery — base rates certainly have an impact on the slope of the recovery, but it's a recovery nonetheless,” Blackstone Global Co-Head of Real Estate Nadeem Meghji said.
“When we have conversations with our investors, the conversation has shifted from if we should invest to when we should invest.”
After a year in which real estate values and volumes were widely seen to have bottomed out yet a sustained recovery never quite arrived, 2025 promises a better 12 months in the U.S, UK and globally, a host of major investors and advisors told Bisnow.
Some of the best returns for a generation are on offer in a sector that suffered dramatically from rising interest rates across the globe. The U.S. is set to be a huge beneficiary of real estate investment due to an economy unmatched anywhere in the world, and once-beleaguered retail real estate is likely to come back into fashion.
But property will also need to compete harder for capital than it has done in previous periods of recovery. It faces strong competition from the bond market for investment capital, while infrastructure looks like a better bet than real estate as long as interest rates remain elevated.
Add in capital flowing less freely around the globe, an office sector that is improving but still in flux and near constant geopolitical uncertainty dragging on liquidity, and the next phase of the real estate cycle is going to be very different to previous upticks.
“There are good investment opportunities in all of the regions — but not all investment opportunities are good,” Nuveen Real Assets Global Head of Strategic Insights Abigail Dean said.
Rate Of Cuts Slower Than Hoped
At the start of 2024, real estate professionals on both sides of the pond hoped that inflation would moderate, leading to interest rate cuts from the Federal Reserve and Bank of England that started in the summer and continued through the year. The result would revive real estate investment volumes and values.
It sort of happened. The Fed and BoE did cut rates but not by as much as markets had expected. In the UK, a budget from the new Labour government that featured higher levels of borrowing trimmed rate-cut expectations. The prospect of tax cuts, strong growth, more borrowing and tariffs from an incoming Trump administration had a similar impact in the U.S.
That meant real estate volumes recovered but fell short of early expectations. MSCI data for the year to the end of November showed U.S. investment volumes at $276B compared to $289B in all of 2023. In the UK, the figures were $49B versus $47B in 2023. Global volume was $595B compared to $647B in 2023.
“The tariffs may not be as bad as people fear, it's definitely a trade negotiation tool. And if that's the case, I think we can all expect inflation to be higher for longer,” Gaw Capital Chairman and Managing Partner Goodwin Gaw said. “That means rates are going to stay higher for longer — even though the trend is definitely a reduction — for two to three years at least. It will be less of a reduction in interest rates than people hoped for.”
Still, an improvement is an improvement, and values did hit bottom in the middle of 2024 if data from the Odyssey index of U.S. real estate funds and MSCI data for the UK is a guide.
The world’s biggest investors expect that to continue into 2025.
Blackstone spent about $30B in 2024, a huge uptick from 2023. “We’re not waiting for the all-clear signal” was a constant mantra in interviews with top real estate executives.
While it’s hard to make exact predictions on investment levels, Meghji said Blackstone expects 2025 to usher in improved values and volumes.
Despite uncertainty about where inflation is heading, the evidence Blackstone sees in its real estate and private equity portfolios suggests it is moderating faster than government figures indicate. Wage growth in the companies it owns is slowing as are construction costs and lodging costs in its real estate portfolio. Over time, easing inflation will lead to an ease in interest rates, boosting liquidity and capital values, Meghji said.
“As we're having this call today, the 10-year [U.S. government bond rate] is at 4.5%,” Meghji said. “And of course, a higher 10-year has an impact, but the impact is on the slope and the pace of the value recovery, not on the endpoint. We still believe that values are heading upward from here because there's more liquidity.”
Sentiment has improved, spreads are compressing, debt availability is increasing, and fundamentals are supported by dramatically reduced new construction activity, Meghji added.
“And that's really what we're focused on as investors, is to take a long-term view and to focus on the endpoint, which we believe is a healing commercial real estate market,” he said.
Nuveen's Dean said that the firm noticed a greater depth of bidders on deals it looked at in the second half of the year. Improving income in sectors like industrial, rented residential and alternative sectors like storage meant that values turned positive in the latter part of 2024.
In the five-year period after the last three major downturns — the early 1990s crash caused by overdevelopment in major markets, the post dot.com malaise and the 2008 global financial crisis — cumulative returns for real estate were about 80%, Dean said. Buying the right assets now could make 2025 a brilliant year to invest.
CBRE Investment Management’s five-year forecast is predicting better returns than at any point since 2011 if investors pick the right strategy, Chief Economist and Head of Insights and Intelligence Sabina Reeves said.
Real Estate's New Rival: Infrastructure
Yet it won't be plain sailing. In the wake of the GFC, interest rates dropped to near zero and capital came flooding into the sector as investors across the world looked for yield and stable income.
That is less likely to happen today. Allocations to the sector will increase compared to the last two years gradually.
“If we're heading into a new sort of 10 to 15-year cycle, the prior 10 to 15-year cycle, the quantitative-easing era, was so beneficial for real estate,” Reeves said. “Everyone was building up the allocations to real estate, going from 5% to 10%, and they've done that now. And the new pony in town is infra.”
Infrastructure investment is set to capture a bigger share of the asset allocation of large institutions in 2025 and beyond. It may even eclipse real estate, which has traditionally been one of the largest alternative asset classes, multiple investors told Bisnow.
Income from infrastructure investment is often inflation-linked, Reeves said. And some of the big ongoing secular changes in society, including the decarbonisation of the economy and a need for more digital capabilities, will inevitably lead to greater infrastructure investment.
“I think there'll be a lot more capital than there has been, but I don't think it's going to be record year, because, relatively, infrastructure is still very interesting, with much more stable cash flows,” Oxford Properties Executive Vice President, Europe and Asia-Pacific Joanne McNamara said.
Real estate has repriced to the point that investors are comparing the multiples they are paying to other private and public market assets and comparing them to the income and duration they receive from bonds. They are finding that property compares favourably.
“You can actually transact at a level that is now relatively pricing-attractive for a portfolio,” McNamara said.
Whatever the volume of money targeting the sector, capital is unlikely to circulate around the globe in the same way as the decade prior to the 2022 repricing.
The world is “deglobalising” generally, and the same is true of capital, CBRE IM’s Reeves said. Capital has become more regional, with U.S. and European money pulling out of China and Singaporean investors filling the gap, for example.
Accordingly, there is likely to be less Asian investment in the U.S. and Europe.
“I think you can kiss that goodbye. For the years to come, you're not going to see that anymore,” Gaw said.
When money was cheap, investors were happier to diversify abroad. Now they want to stay closer to home.
“Geopolitics is becoming such an overriding concern,” he added. “People are saying it doesn't pay to actually go. And obviously you see a lot of Asian capital still nursing the wounds [of failed investments in the U.S. and London] in a big way. Many of those big hits have not been even recognised. So they're still hiding behind below the blanket, not wanting to recognise those hits and won’t be putting new money to work.”
U.S.A Is No. 1
In terms of where capital does flow, the U.S. is likely to be a large beneficiary, because of the strong economic growth the country is exhibiting, Oxford’s McNamara said. Investors have been more focused on sectors than geographies for almost a decade, Oxford’s McNamara said, with the desire to invest in living or industrial sectors more pressing than location as long as is it was in a developed country within a decent-sized city.
Now, the decoupling of economies in different parts of the world is bringing geography back into play.
“The U.S. really is dislocating from the rest of the world in terms of its ability to grow, and even if you include Asia, Asia and Europe are just not growing in the same way,” she said.
Slower economic growth combined with lower inflation in Europe means interest rates are forecast to fall faster there than in the U.S. and UK. Investors might target Europe because of the bigger spread between real estate cap rates and borrowing costs McNamara added.
The relative political stability of the UK compared to France and Germany, along with the fact that values have dropped faster there than in any other country in the world, would be beneficial for investment into the country, Reeves said.
“The UK is kind of like the calm centre of the storm,” she said. “Isn't it lovely to say that?”
When it come to sectors, there was a surprising word on the lips of almost every investor Bisnow spoke to: retail.
After 15 years as the most unloved sector in real estate, Blackstone’s Meghji, CBRE IM’s Reeves, Nuveen’s Dean and Oxford’s McNamara all cited it as an area with potential for good returns over the next few years. Blackstone paid $4B for Retail Opportunity Investment Corp in 2024, and Meghji said the firm thinks U.S. grocery-anchored retail provides a compelling opportunity.
Many underperforming centres have now been converted or failed, and Reeves pointed out that in the UK, retail has the highest occupancy level of any sector, according to MSCI. With industrial and multifamily cap rates typically at 4% to 6% in major cities, higher-yielding retail looks like good value.
“The right retail you can buy at attractive cap rates,” McNamara said. “Rents have rebased, there is a good amount of demand, a good balance of supply and demand, and you can grow your cash flow.”
Beyond that, insiders name-checked several other sectors for growth. It doesn't take a predictive artificial intelligence program to guess Blackstone’s Meghji cited data centres as his top pick. The firm is building about $80B of data centres globally.
Oxford’s McNamara said the firm likes the European industrial sector, particularly last-mile, as well as residential and student housing in Europe and multifamily in the U.S.
Nuveen’s Dean cited several sectors but particularly mentioned affordable housing. The company has been one of the largest investors in U.S. affordable housing over the past decade and is keen to transport the strategy across the Atlantic.
Gaw is a fan of hospitality in big cities like London and New York where business travel and conferences have returned in earnest. Southern Europe is another opportunity since leisure travel is booming and hotels and resorts can be consolidated.
He is also a contrarian buyer of U.S. West Coast offices, pointing to cheap pricing and the potential for corporate expansion of occupiers in the region from growth in AI offices.
Many of the big investors interviewed by Bisnow remain wary of offices. Reeves said a CBRE IM analysis showed that buying the best of the best offices in major cities doesn’t bag the same return as buying older logistics facilities.
But for some, there is a case to be made for the sector.
“Right after interest rates really surged, you saw office buildings trading and people weren’t saying, ‘I won't buy an office building for more than $150 to $175 a foot,’” Stacom CRE founder Darcy Stacom said of New York City offices.
“Today, they're at $300 a foot. I think next year we'll see that be easily $400 a foot,” she added, predicting an upturn in volume of around 25%.
Different views are what make a market, and in 2025, slowly and with a lot of friction, those views are likely to lead to greater liquidity. For those that get it right, that means profit.
“I think there are going to be people making money out of real estate investment in all the different regions over the next five years,” Dean said.
