Private Real Estate: Distinct Asset Allocation Benefits
Private real estate offers distinct asset allocation benefits and is less influenced by capital market dynamics.
Private Real Estate Cycle Takes a Positive Turn
Dec 12, 2024
As markets heal from sharp dislocations and bottoming values, lower rate potential boosts the dealmaking environment, fueling a brighter real estate outlook.
Global real estate values have reset after rising rates drove repricing of 20% to 25% over the past two years. As capital markets heal after sharp dislocations and values bottom across most sectors, opportunities abound amid gathering momentum. Against that backdrop, increasingly confident investors lifted private real estate to its first positive return in seven quarters in the third quarter, drawing attention to an attractive entry point marked by more welcoming monetary conditions.
LOWER RATE TAILWINDS
With lower interest rates fueling a brighter outlook for 2025, we believe it is a great time to explore real estate opportunities across the risk spectrum. Lower rates should foster a better dealmaking environment that boosts long-term growth potential.
AN EMERGING NEW CYCLE
One of the nice things about real estate is that it is cyclical, and the cycles tend to be predictable. Historically, income remains steady through cycles with healthy capital appreciation over the long term. The relatively few drawdown periods on record tended to be short-lived and followed by prolonged recovery periods.
Sources: Morningstar, PGIM Real Estate as of 9/30/2024. Based on NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE). Past performance does not guarantee future results.
Darin Bright
Head of U.S. Core Plus Investment Platform
PGIM Real Estate
History has shown that it’s better to invest early in the cycle to increase growth potential and reduce the probability of capital losses. With asset repricing likely past its trough, we think now is an opportune time for long-term investors to add capital to private real estate markets.
PREVAILING STRUCTURAL GROWTH THEMES
- Demographic shifts: Aging baby boomers and millennials are the two largest demographic segments. A significant housing shortage for these groups is driving surging demand for senior living, affordable housing, and self-storage. Demographic trends are also creating interesting opportunities in necessity-based retail and life sciences.
- Digitalization: Continued digital transformation is materially changing the real estate landscape in areas such as logistics (distribution and last mile), office with knowledge-based tenancy, and life sciences. As e-commerce grows, industrial and retail play complementary roles, with e-commerce driving industrial demand while bricks and clicks support well-located retail that offers daily use and services.
Related Insights
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Private Real Estate: Today’s Most Compelling Trends
Demographic shifts and increased digitalization are creating structural tailwinds in select real estate sectors.
ACTIVELY INVESTING THROUGH PARADIGM SHIFTS
PGIM asset managers highlight key trends and related opportunities that they believe warrant the most investor attention as 2025 gets underway.
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