After a five-year period of volatility in commercial real estate returns, U.S. real estate—broadly defined—is reemerging as an appealing area within private markets.
Unlike the days of Covid, when U.S. office buildings stood empty and a bruising rate-hiking cycle led to a correction in real estate valuations, opportunities are emerging in new and unexpected pockets of the market. Housing affordability concerns are spurring a generational shift toward rental properties. Artificial intelligence (AI) and domestic manufacturing are driving demand for state-of-the-art industrial assets. And a lingering capital shortage in the bank lending ecosystem1 has shifted the balance of power toward private real estate lenders, who are stepping in to fill the gap.
We view real estate as a key source of portfolio diversification, providing inflation-resilient income and upside potential. Historically, real estate has been an attractive, natural hedge under conditions like today’s higher, more volatile price pressures—but investors may need to rethink their approach.
U.S. real estate today is a glittering mosaic of micro-trends—each of which has its own challenges and demand drivers. Here, we explore three powerful real estate themes likely to shape the next decade of returns:
One top trend today: A seismic shift toward rental housing as buyers in the United States seek to form households but delay home ownership. First-time home buyers’ median age is now 40 (versus 33 five years ago and 28 in the early ’90s).2 We see this trend driving durable demand for single-family rental properties, which may cost renters about $850 less per month than owning a home.
Looking ahead, mortgage affordability pressures are unlikely to fade—and demographic drivers are strengthening.3 That makes rental housing stand out as one of the clearest potential long-term investment opportunities in U.S. real estate. We anticipate that sustained demand for rental assets, especially single-family rentals, at a time of tight supply, will likely support strong risk-adjusted returns over the coming decade.
This is a big change. For decades, home ownership has been a cornerstone of wealth creation. But a persistent, multi-million-unit housing supply deficit—a legacy of underbuilding that dates back to the global financial crisis—persists. We expect the current market shortfall, an estimated 2.8 million housing units, may take up to 10 years to resolve.4
Affordability pressures have also reached historic levels: The cost of owning a home in the United States is now over 45% higher than renting.5 The median down payment for a single-family home (around $35,000) has doubled since before Covid.6
What’s more, the housing market remains static because homeowners currently enjoy a rate advantage: About 50% of U.S. mortgage borrowers pay sub-4% rates,7 leaving little incentive to sell and take on higher payments.8
Even in the event of an economic downturn, we’d expect the sector to be reasonably resilient: Renters, unlike homeowners, aren’t at risk of mortgage default. They can simply move to less expensive rental properties.
U.S. industrial real estate—which includes warehouses, distribution centers, manufacturing facilities and data centers—is undergoing a structural transformation, driven by the convergence of AI, digitalization and a renaissance in advanced manufacturing.
If, as we expect, the AI revolution continues to disrupt business as usual, demand for high-powered industrial assets—properties equipped to handle large electrical loads—will keep rising. These purpose-built assets, which are essential for data centers, AI operations, robotics and advanced manufacturing, require significant capital investment. This creates a barrier to entry that gives landlords pricing power and offers investors a compelling combination of higher potential returns and lower relative risk. Over the past year, high-powered industrial assets have delivered average returns of 8% compared with less than 3% for standard industrial properties.9
Today, large technology companies and logistics operators are signing long-term leases for well-located, modern industrial properties, driving vacancy rates below historical norms and supporting faster relative rent growth. With power constraints and land scarcity now central concerns, specialized industrial development and strategic land (and power) acquisitions are increasingly important to the tech industry.
You can add another growth driver to the mix: a renaissance in U.S. manufacturing as companies seek to protect their supply chains and assemble goods closer to the point of sale. Several major U.S. laws10 and the highest US average effective tariff rate since 193011 are driving reshoring activity for subsectors including semiconductors, electric vehicles and batteries, and advanced manufacturing. Given that broad demand for manufacturing facilities has increased nearly 50% per year since 2020,12 we expect demand for logistics hubs, distribution centers and specialized industrial facilities will remain elevated.
For investors, the industrial real estate sector offers several advantages: the demand we’ve noted, stable cash flows, high occupancy rates, generally inflation-linked rent growth and a lower likelihood that the properties will quickly become obsolete.
We also see an emerging opportunity in the growing use of “triple net leases,” which are prevalent in the industrial sector. These leases contractually oblige business tenants to pay all the operating expenses for a commercial property—including taxes, insurance, and maintenance—in addition to base rent. These contracts can provide investors with reliable, inflation-hedged income streams (supported by contractual rent increases); they can also offer exposure to a diversified portfolio of underlying properties (which may result in lower defaults in certain market segments compared with high yield areas of the public markets).13
Industry headlines tend to focus on falling commercial real estate valuations, but a different profound shift is happening today in the “capital stack”—a real estate project’s hierarchy of debt and equity investments.
Over the next two to three years, hundreds of billions in real estate loans are scheduled to mature as many loans originated in the low-rate environment of 2019-2021 come to roost. These will affect multiple sectors across real estate. All will require refinancing and many borrowers will have to refinance loans at higher rates than they previously enjoyed.
Securing fresh credit on similar terms may also be harder in the years ahead. Regulation, among other pressures,14 has led regional banks—historically a critical backbone of commercial real-estate lending—to sharply reduce their commercial real estate lending activity.
The upshot? Borrowers in need of refinancing are seeking structured strategies.15 For many private credit funds (and other real estate lenders)16 with abundant capital, this moment presents an opportunity.
We expect to see investment offerings with equity-like returns and debt-like features, especially when these deals are well collateralized or essential, such as loans refinancing industrial real estate. Average debt yields in the industrial sector are currently in the low double-digits.17
Today, investors can finance newer, well-located assets with stronger structural features and potentially earn higher risk-adjusted return.18 For many investors leery of commercial real estate risks—such as falling property values, tenant defaults, illiquidity, and the impact of elevated interest rates—allocating to real estate credit could be a logical first step for its potential income, downside risk mitigation and exposure to the sectors most likely in high demand.
Real estate values may have undergone a painful reset since the start of this decade, but we see new opportunities emerging—more selective, more targeted and more likely to play out over the long term than in prior economic cycles. For investors willing to rethink how and where they allocate, we believe the U.S. real estate market is poised not only for recovery, but reinvention.
KEY RISKS
Private credit securities may be illiquid, present significant risks, and may be sold or redeemed at more or less than the original amount invested. There may be a heightened risk that private credit issuers and counterparties will not make payments on securities, repurchase agreements or other investments. Such defaults could result in losses to the strategy. In addition, the credit quality of securities held by the strategy may be lowered if an issuer’s financial condition changes. Lower credit quality may lead to greater volatility in the price of a security and in shares of the strategy. Lower credit quality also may affect liquidity and make it difficult for the strategy to sell the security. Private credit securities may be rated in the lowest investment grade category or not rated. Such securities are considered to have speculative characteristics similar to high yield securities, and issuers of such securities are more vulnerable to changes in economic conditions than issuers of higher-grade securities.
Real estate, hedge funds, and other private investments may not be suitable for all individual investors, may present significant risks, and may be sold or redeemed at more or less than the original amount invested. Private investments are offered only by offering memoranda, which more fully describe the possible risks. There are no assurances that the stated investment objectives of any investment product will be met.
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