header.search.error
A more constructive interest rate environment, valuation resets, dwindling supply, and shifting demand from technology, demographics, and evolving consumer preferences are fundamentally reshaping real estate markets, argues Larissa Belova
After a turbulent period of repricing and disruption, the global real estate market is approaching what many see as a rare entry point. Valuations have adjusted, interest rates, while elevated, have stabilized, new supply is dropping across sectors, and demand drivers are evolving rapidly, opening one of the most compelling investment windows in years. Since the end of 2022, when the increased cost of capital started to flow through the capital markets, commercial real estate values have declined in the US by 20% and by 16% in Europe.1 Leading institutional investors have publicly highlighted this as a generational buying opportunity following valuation resets across major markets.
This is more than a cyclical shift. Real estate markets are exhibiting a combination of factors not seen after prior historical corrections, where overbuilding or excessive use of leverage contributed to distress. On the contrary, fundamentals have remained stable or positive in most sectors, there is little evidence of overleveraging and, with exceptions for certain geographies and sectors, falling supply has buoyed performance and rent growth.
For years, investors rode a wave of low interest rates and steady appreciation, but 2022 was a turning point. As central banks raised rates to combat inflation, the ground shifted beneath the feet of owners, occupiers and investors alike.
The result was a global reset – one that goes beyond balance sheets to redefine what real estate means in a changing world. And while pricing adjusted, the way we use real estate and the drivers of demand have evolved just as rapidly. Themes like affordability, modernity and need-based demand are reshaping portfolios and creating opportunities for strong risk-adjusted returns with downside protection.
The numbers tell a sobering story. The value of the professionally managed global real estate investment market shrank by 4.1% in 2024 to USD 12.5 trillion. This was the third consecutive year of contraction after more than a decade of growth. The US market alone declined to USD 4.9 trillion, even as its share of the global market rose, a reflection of sharper contractions elsewhere.¹ This contraction wasn’t just sentiment-driven – it reflected rising borrowing costs, currency headwinds and a fundamental rethink of risk and value.
As the dust settled, the composition of the market itself began to change. Offices, once the bedrock of institutional portfolios, saw their share of the global market fall to 27.2%. Industrial assets overtook office as the second-most invested property type in the Americas, while residential continued to gain ground, driven by demographic trends and persistent housing shortages. Transaction volumes, having plunged in 2023, rebounded by 18% in 2024 as interest rates stabilized and the gap between buyers and sellers narrowed. Yet, deal activity remains well below pre-pandemic averages. And the global turnover ratio, meaning volume as a share of market size, was just 6.2% in 2024, albeit up from 4.0% the previous year.¹
Behind these numbers lies a deeper story: a fundamental reordering of how we invest in, operate and own real assets.
Housing affordability and need-based demand bring specialty sectors into the limelight
As inflation, interest rates and lack of housing supply wreaked havoc on most corners of the world over the past few years, affordability has become the number one concern for most consumers and tenants. Owning a home has become exceedingly out of reach with housing prices reaching record highs and mortgage rates remaining elevated, especially in the US. These effects have propelled rentership tailwinds in multifamily, as well as other sectors linked to those challenges, including manufactured housing, single-family rentals and self-storage.
Unlike multifamily, which has solidified as an institutional investment class, specialty sectors are still a small part of institutional portfolios. However, they are gaining increasing momentum as investors recognize the counter-cyclical protection, lower capex outlays, more consistency of cash flow as well as the opportunity to drive alpha through higher income growth and appreciation.
These sectors have started to drive more penetration in allocations, especially in the US, but also increasing in other parts of the world, as investors have recognized the durability of the income streams and downside protection in these sectors. Five years ago, specialty sectors were less than 5% of the NCREIF ODCE, and as of 3Q25, they represent 9.3%. With the recent correction and persistent challenges around affordability, we view this as an optimal entry point into these sectors.
Smarter warehouses
Robotics and automation have moved from fiction to reality in the modern warehouse. The rise of e-commerce, the relentless drive for efficiency and cost controls, and faster delivery to the consumer have made high-tech fulfillment centers the gold standard.
These facilities demand higher clear height, thicker concrete slabs, robust power infrastructure and flexible layouts to accommodate fleets of robots and automated storage systems. The result? A clear divide between legacy and modernity in logistics assets. Class A warehouses designed for this new era are seeing strong leasing activity and rental growth, while older, less adaptable assets risk being left behind.3
More than a passing trend, this represents a structural shift. In the US, industrial transaction volumes rose by 27% year-over-year in early 2025, a testament to the sector’s resilience and the ongoing shift toward automation.4
Manufacturing and supply chain shifts
At the same time, the global map of supply chains is being redrawn. Onshoring and nearshoring are reshaping US distribution networks and driving renewed demand for manufacturing and logistics real estate. Policy support for advanced manufacturing is translating into multi-year demand for modern industrial space, particularly in strategically located North American markets.
Companies are seeking to enhance resilience, reduce exposure to geopolitical risks and shorten delivery times by bringing production closer to end markets, which is fueling demand for facilities near major transportation nodes and energy grid infrastructure.⁷
This is not a quick fix, however. Manufacturing investments typically require three to five years from site selection and power procurement to operational launch.⁸ For investors able to underwrite through volatility, this imbalance between constrained supply and evolving demand represents a rare opportunity to drive value creation early in the next cycle.
AI and data infrastructure
Artificial intelligence (AI) is reshaping real estate in ways few imagined even a few years ago. Data centers, the physical backbone of the digital economy, are now among the most sought-after assets.
In leading markets such as Northern Virginia and Frankfurt, AI-driven compute growth has pushed power grids to their limits, making grid access, not headline vacancy, the defining constraint for new development. The surge in demand for AI and cloud computing is not only driving up rents for data centers, but also transforming the investment calculus for infrastructure and logistics assets.5
These mega projects require billions in investments and long time horizons for approval and development. The power and water constraints alone create broader challenges for growth and shared resources.
In a rapidly evolving, technology-driven asset class that sits between real estate and infrastructure, it is worth asking which innovations might unlock new opportunities – and which might cool the current data-center frenzy. In the near term, transformational change may be limited, yet momentum is building behind solutions that could quite literally take the sector to new heights. Space-based solar, with its uninterrupted access to sunlight and absence of terrestrial constraints, is emerging as a potential answer to data centers’ growing energy demands. Major technology companies are already exploring the possibilities.
Real-world shifts
The transformation is not limited to logistics and data. Aging populations in the US and Europe are supporting resilient demand for medical office and senior housing assets.
In North America, institutional investors are ramping up build-to-rent strategies to address housing undersupply. Meanwhile in Europe, healthcare real estate is being reshaped by demographic change and regulatory reform. Rapid urbanization in Asia-Pacific is sustaining long-term demand for logistics, multifamily, and medical infrastructure.
Office, by contrast, remains a story of bifurcation. Prime assets with strong amenities and transport connectivity are stabilizing and thriving, while secondary stock in markets such as San Francisco, Chicago, and parts of London has vacancy levels north of 25 to 35%. Canary Wharf’s repositioning following anchor tenant departures is a clear illustration of the broader shift from monoculture office clusters to mixed-use districts.
Rates, risk, and the new operating model
With borrowing costs still above yields in many Western markets, returns can no longer be engineered through leverage alone. The edge has become operational: reducing vacancy, amenitizing space, upgrading energy performance, repositioning for mixed use, and deploying real-time asset management. Policy is also reshaping the cost of capital and deployment velocity. The Inflation Reduction Act and related manufacturing incentives in the US are anchoring new industrial ecosystems across the central part of the country, while in Japan, monetary policy continuity has preserved pricing stability in prime office markets compared to Western peers. In Asia-Pacific, the retrenchment of regional banks has created openings for alternative lending platforms.
Sustainability: A consistent imperative for value creation and liquidity
In Europe and many other parts of the world, sustainability has moved from the periphery to the center of real estate strategy.
Tenants and investors are demanding buildings with efficient systems: advanced heating, ventilation and air conditioning (HVAC), renewable energy and smart controls. Such features are not just nice-to-haves; they are increasingly required by regulators, add measurable payback in reducing ongoing operating costs and are essential to attracting and retaining tenants. The flight to quality is clear. High-quality, energy-efficient buildings command premium rents and lower vacancy rates.6
Regulatory frameworks such as the EU Taxonomy and local energy performance standards are raising the bar for building quality and sustainability. In fact, inefficient buildings are now experiencing a brown discount not only on price, but also on their ability to secure refinancing.
Investors are focused on future-proofing portfolios, knowing that assets that do not meet evolving sustainability criteria risk becoming stranded or discounted in the marketplace.6
Outlook
In the US, the industrial and living sectors are positioned to lead the recovery and growth. Warehouses and logistics facilities will continue to attract capital, supported by the surge in e-commerce, the reconfiguration of supply chains and the expansion of data infrastructure.
Multifamily assets are expected to sustain institutional investment as the housing shortage endures. Meanwhile, other living segments like manufactured housing and seniors housing offer additional diversification, downside protection and alpha potential.
The office sector, by contrast, remains bifurcated, though we are starting to see signs of selective opportunities emerging. Demand will concentrate on Class A, amenity-rich and sustainable buildings, while older assets may face further obsolescence and require repositioning or conversion to alternative uses. The fact that industrial assets have overtaken office in the US signals a lasting shift in investor priorities and market fundamentals.3
In Europe, the outlook is equally dynamic. Lower interest rates and hedging costs for foreign investors, combined with robust fundamentals in residential and logistics, are expected to underpin a constructive environment for investors.
In Asia-Pacific, although macro conditions remain diverse, the region stands out for its combination of rapid urbanization, structural undersupply and growing institutional participation. The retrenchment of regional banks has opened the door for alternative lending platforms, while investors with specialist operating partners are capitalizing on dislocation in sectors such as logistics, multifamily and healthcare.
The concentration of investable assets is expected to intensify, with the top five markets (US, China, UK, Japan and Germany) projected to account for an even greater share of global capital flows. This underscores the importance of market selection, operational excellence and a forward-looking approach to portfolio construction.2
From disruption to opportunity
Beyond capital markets dynamics, the way real estate is used and the demand drivers behind it have evolved dramatically. Themes such as affordability, modernity, technological advancement and AI, and need-based demand are reshaping portfolios across sectors. Investments tied to these secular trends, from attainable housing and logistics to senior living and self-storage, offer the potential for stronger risk-adjusted returns with inherent downside protection.
Policy is also reshaping the cost of capital and deployment velocity. For example, the Inflation Reduction Act and related manufacturing incentives in the US are anchoring new industrial ecosystems across the central part of the country. Meanwhile, monetary policy continuity in Japan has preserved pricing stability in prime office markets compared to Western peers.
Dwindling supply is yet another driver of demand and source of resilience that we anticipate in most sectors. Across nearly all sectors, new supply is falling sharply as higher construction and financing costs constrain development pipelines, creating a powerful setup for income growth in existing stock and selective acquisitions at reduced bases.
Supply is especially muted in attractive sectors such as senior housing and retail. In senior housing, the sector saw a sharp drop in supply growth following the pandemic, and construction levels are now at their lowest point since 2013. Retail’s construction pipeline remains near historic lows, with deliveries hovering near 0.3% of total stock. Similar trends are evident in Europe and Asia, where rising demand is colliding with limited supply. For example, in France, there is a significant supply gap in senior housing, with only one place available for every 10 individuals aged 75 and older. Likewise, Japanese REITs consistently highlight the lack of new supply in the luxury rental housing market, particularly in Tokyo, while strong demand continues to support steady occupancy rates and rent levels.10
The effects of all these demographic, consumer behavior and technological disruptions will continue to shape the global real estate landscape in profound ways. And with borrowing costs still above yields in many Western markets, returns can no longer be engineered through leverage alone.
As we look at the next 12 to 36 months and beyond, we view today as a highly compelling entry point, but the winners in global real estate will be defined not only by when and where capital is allocated, but by how assets are operated, adapted and future-proofed. Operational excellence is becoming an edge: reducing vacancy, amenitizing space, upgrading energy performance, repositioning for mixed use and deploying real-time hands-on asset management.
Investors who focus on resilience, technological readiness and sustainability should be well-positioned to capture value in a market that is being fundamentally reshaped by the transitions we are observing today.
Sources:
Alternative alpha
