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CONTRIBUTORS

Indraneel Karlekar, Ph.D

Global Head of Research and Strategy, Clarion Partners

Executive summary

  • Emerging new cycle in commercial real estate: Core real estate has posted five consecutive quarters of positive returns, driven by consistent income returns and flat to modestly positive appreciation returns.
  • Solid fundamentals underpin NOI (net operating income) growth: Occupier demand remains resilient in most asset types and new supply is falling materially. Together, this should lead to declining vacancies and positive rent growth, supporting NOI expansion.
  • Structurally driven property types are expected to outperform: Sectors driven by demographic shifts and innovation, particularly housing, industrial, and alternative sectors, are positioned for above-average performance; more differentiated performance by property type and geography should continue, signaling a more nuanced cycle going forward.
  • Public market pricing support: The valuations of public REITs, which have often served as an early indicator for private commercial real estate trends, support a commencing cycle.
  • Resumption of Fed rate cuts expected to support liquidity & overall economy: Easing by the Federal Reserve should lower borrowing rates and benefit investment returns which we expect to increase transaction volume.
  • Structural benefits of core: Core private real estate should serve as the foundation of investors’ portfolios, given its lower risk profile and strong risk-adjusted returns.

Historically, factors such as stabilizing values, restricted supply, and strengthening fundamentals have indicated the beginning of a new commercial real estate cycle—all factors that we believe are visible in the market today. The consistently positive total returns observed over the last five quarters, along with encouraging indicators from the public markets, further substantiate that a new cycle is commencing. Considering the varied impact of structural trends by property type, differentiated performance between sectors, as well as an evolving and uncertain policy environment, the recovery and growth trajectory will likely differ from previous cycles. Sectors within the housing, logistics, and healthcare umbrellas, in particular, (many of the alternative real estate sectors that are benefiting from secular tailwinds like demographic shifts, innovation, and the rise of the knowledge economy), should garner the strongest investor response.

Investors who identify and respond to these structural changes should be well positioned to achieve outperformance.

In a recovering real estate cycle, core private real estate should serve as the foundation of investors’ portfolios. As demonstrated in Figure 1 earlier in the paper, core real estate has repeatedly delivered attractive total returns, benefiting from rising occupancies and growing income streams coming out of downturns. Indeed, recent PREA research highlights the reliable performance of core real estate across market cycles.1 By anchoring real estate allocations to core strategies, investors have the platform to build resilient allocations to the sector and derive the holistic benefits of the asset class.

Endnotes

  1. Non-core real estate returns: an empirical approach by Jim Costello, Wilson Ding, Elizabeth Francis and Jacques Gordon. Journal of Portfolio Management, Fall 2025.

 

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