The real estate market recovery is gaining momentum, marked by significant improvement from a year ago. Following a period of constrained deal flow and heightened volatility, we’re now seeing a surge in activity and a strong pipeline of attractive investment opportunities. PGIM Real Estate’s Brandon Short discusses market dynamics and investment opportunities in private real estate, and why the current backdrop may present an attractive entry point for investors.

• Attractive entry point. Real estate values have bottomed. Real estate return expectations now exceed returns from fixed-income alternatives. Debt remains neutral to accretive for returns, driving increased deal flow.  Most sectors are pricing below replacement cost creating an opportunity to capitalise on strong risk-adjusted returns.
  
  
• Fiscal policy shifts on the horizon. Potential fiscal policy changes such as tariffs and immigration reform increase risk of higher inflation and interest rates. However, this risk is offset by measures like expanded tax cuts and the JOBS Act, supporting GDP growth. Given this backdrop, we are raising income growth expectations across nearly all asset classes.
  
  
• Historical trends signal a rebound. Historically, real estate cycles have experienced prolonged recovery periods following major disruptions such as the global financial crisis. After seven negative quarters, real estate returns rebounded in the third quarter, with momentum continuing to strengthen in the fourth quarter. This marks an encouraging sign of a sustained recovery ahead.

• Constrained housing supply. The U.S. faces a long-term housing shortage, with a projected annual deficit of 3.3 million homes over the next decade. Limited new construction, driven by high interest rates, has worsened the crisis. High mortgage rates further restrict homeownership, fueling demand for rental housing and creating strong momentum across the rental market.
  
  
• Focus on necessity-based retail. Necessity-based retail has maintained a much higher occupancy than discretionary retail, such as malls. Population migration to the suburbs will further drive demand for neighborhood grocery-anchored retail. Retail remains attractively priced and offers enhanced risk-adjusted returns.
  
  
• Expansion of e-commerce. Technological advancements are driving demand in e-commerce with consumers becoming increasingly reliant on online purchases. As a result, the industrial sector has been the direct beneficiary of large e-retailers focusing on same-day delivery with growing demand for smaller infill last-mile warehouses.