But we are clear about where we see potential value and believe we are in the early stages of a potentially generational investing opportunity in real estate.
Confidence during times like these comes from focusing on facts that are true. We know that values have reset significantly over the last three years, a phenomenon that has become widespread across real estate markets globally.
We also know that supply has been constrained, and occupancy rates are high in most property types. Meanwhile, the cost of capital is stabilising and debt is plentiful across a diverse array of lenders.
These are all strong factors that lead us to believe the time is now to invest, despite uncertainty blurring the picture at the macro level. The question remains, though, of exactly how to navigate the opportunity at a time of such extreme uncertainty.
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Hearing the signal through the noise is critical. One clear signal is that capital is being reallocated from the US to Europe and Asia. According to AFIRE’s most recent survey, 63% of non-US investors have a negative view of the US despite intending to continue allocating to the market. Investors are rethinking their capital allocations and focusing on their home market. This is particularly pronounced with German investors.
On the other hand, an area where considerable noise is generated is the supply chain implications of tariffs. The generally accepted wisdom is that companies are looking to relocate. However, the signal we are getting from our tenants is clear: they are more focused on trying to understand where tariff negotiations will settle rather than relocating their operations.
In Mexico, most of our tenants are multinational companies that have established nearshoring operations to access the US market. Currently, none have expressed any interest in relocating outside the country. Similarly, our conversations with local institutional investors in Mexico suggest that there is no loss of faith in the country’s nearshoring trend.
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There is also concern about data centre development, with some expressing worry that technology companies are engaging in an arms race to announce ever larger data processing requirements linked to artificial intelligence investments. The reality is that many data centre operators are aware that when technology companies announce their data centre investments, they overstate their requirements and end up needing less.
In other words, there is a difference between the (huge) numbers announced and what technology companies end up needing and, therefore, what ends up getting developed. The restated demand is still significantly higher than supply, so the fundamentals remain strong once the headline announcement figures are taken into account.
Another consideration is that now, more than ever, different geographic regions offer distinct dynamics.
The US appears to be moving from exceptionalism to a form of “new realism”. Lower economic growth and more elevated inflation could indicate lower real estate returns than expected just a few months ago. This reality focuses minds on where resilient opportunity lies. For us, affordable and senior housing are promising, both of which are underpinned by entrenched demographic and supply/demand factors.
Meanwhile, Europe’s new desire for self-reliance creates the prospect of significant state-led investment. While economic growth remains low, this investment could bolster a market that already benefits from a low cost of capital, low supply, a recovering transaction market, and has experienced significant repricing.
Asia is differentiated primarily by its highest growth potential. Australia offers one of the best risk-adjusted investment opportunities at the moment, with tight occupier markets and the potential for cap rate compression as interest rates come down. Japan’s shift from deflation to inflation is creating the conditions for sustainable long-term growth, including all major property types in Tokyo and Osaka.
Finally, investors should be able to pinpoint pockets of resilient income growth. Real estate is recovering, but a repeat of the post-financial crisis years, where ultra-low interest rates lifted all real estate sectors in unison, is unlikely. Credit represents one of the most significant opportunities. New loan coupons are high, reflecting higher base rates and competitive lending margins. Similarly, higher rates can help moderate leverage levels, while elevated buy-in yields, low attachment points and improving credit profiles should support attractive returns.
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Within asset classes, not every logistics asset may deliver good performance, but the fundamentals for infill assets are very strong. In housing, focusing on supply-constrained sub-markets and affordability is key.
These themes are underpinned by long-term trends, but analysing local dynamics can also reveal tactical opportunities. The upsurge in tourism in Southern Europe and Japan has created a squeeze on hospitality assets. Grocery-anchored retail has proven resilient in the US, Europe and Australia. Australia and Japan have an undersupply of suitable office assets, as the appetite for working in-person has bounced back.
Our challenge as real estate investors is to shut out the noise beyond our sector. Ambiguity is uncomfortable, but we saw from the period following the global financial crisis that the most compelling investment opportunities present themselves at the start of a cycle.
Although the pace has slowed over the last few months, the recovery appears to be underway. This is the time for seasoned investors to demonstrate the benefit of their experience and to be selective, not on the sidelines.
Raimondo Amabile is co-CEO and global CIO of PGIM Real Estate and Cathy Marcus is co-CEO and global COO at PGIM Real Estate
