Despite war, trade turmoil and economies that seem to change direction every five minutes, experts still see opportunities for large-scale investors in U.S. commercial real estate (CRE).
“A lot of the noise has actually created some better opportunities,” says Tony Davidow, senior alternatives investment strategist at the Franklin Templeton Institute.
“Real estate has obviously gone through a challenging process since the COVID-19 pandemic and its aftermath in the early 2020s,” he says.
That’s an understatement. Everything from stay-at-home orders followed by workers’ resistance to return to their cubicles, to changes in retail shopping patterns to rising demand for data centres has contributed to uncertainty and turmoil in commercial sectors and regions across the United States.
Now, jarring new developments such as a shape-shifting, unpredictable war in the Middle East, as well as ongoing and unresolved battles over trade and tariffs, are adding new and hard-to-predict complications.
Looking past the noise
But Davidow says high-net-worth investors and family office managers should separate out the noise and consider what longer-term opportunities many of these recent setbacks might bring. Look at what has actually happened and where that leaves matters now, he suggests.
“Real estate has definitely taken the brunt of these economic and social trends, and valuations came down substantially from their peaks in the pre-pandemic years. In fact, many properties are now available below their replacement costs,” he says.
“When there’s so much change, there’s often a broad overreaction [among investors]. I think real estate went through that.”
And there may be opportunities on the horizon for investors who think long term.
“We’re not suggesting that all opportunities are equal, but certain areas look attractive if you have the ability to deploy capital today,” Davidow says.
“We continue to have concerns about the [U.S.] office sector [in terms of direct investment as opposed to debt investment]. But we see opportunities in industrial, multi-family, life sciences, and ‘necessity’ retail”—outlets for food, drugs, home supplies, and so on.
Davidow co-authored a recent research paper with Franklin Templeton Institute colleagues Stephen Dover and Priya Thakur, which notes that “as Millennials and Gen-Z enter their prime earning and spending years, necessity retail properties will likely benefit alongside e-commerce. This will be positive for grocery stores and [other] necessity formats.”
The ‘wall of debt’
Investors should also consider paying particular attention to opportunities in real estate debt investment.
“Our favourite investment in private credit is CRE debt, due in large part to the ‘wall of debt’ that will need to refinance in the next several years,” the research paper says.
“After the collapse of Silicon Valley Bank in 2023, regional banks have been reluctant to lend capital, which has left a void in the marketplace,” it adds. (The Silicon Valley Bank collapse, which followed a $42-billion bank run within 36 hours, was the second largest bank failure in U.S. history.) “The real estate market has significant refinancing needs, with an estimated US$2.6 trillion in real estate debt expected to require refinancing between 2026 and 2029.”
The multi-family residential and office sectors hold the largest outstanding debt. As companies continue to struggle with return-to-office policies, “offices [are] facing ongoing stress and potential declines in valuation,” the paper explains.
“This environment creates opportunities for lenders of capital. With more realistic valuations, lenders may be presented with more attractive returns.”
Meanwhile, a new report by McKinsey and Company argues that it’s time for investors to think differently about real estate.
“Foundations of the real estate industry are shifting, and the old normal is not returning; instead, the industry is evolving,” the report says. “Capital is moving again, but momentum is concentrated in specific sectors and strategies. Overall investment and deal activity remain well below historic highs.”
Given the extreme turbulence of today’s economy, “there likely won’t be a return to prior-cycle exuberance, at least in the near-term,” the report adds.
Davidow and the McKinsey report agree that there are numerous targeted opportunities for CRE investment based on demographic trends, innovation (including the deployment of artificial intelligence) and shifting globalization patterns, including consistent efforts in the U.S. to bring manufacturing and production home.
“These macroeconomic themes create opportunities across the real estate market,” Davidow says. “Manufacturing more in the U.S., as opposed to being more dependent on Asia and other parts of the world, suggests that we’ll need to build more facilities for manufacturing and to restructure supply chains.”
Deal value is recovering
Globally, the value of real estate deals reached US$842 billion last year, up 10 per cent year over year, although the number of transactions was flat, McKinsey said. But investment has been going up since 2023 in specialty property, such as data centres, seniors and students housing and flexible industrial properties that can be tailored to companies’ sizes and uses.
The global volume of data centre deals alone was up 37 per cent, and deal volume for Class A office assets in the U.S. went up 17 per cent year over year. McKinsey’s research reinforces Davidow’s point that there is still some weakness in lower-quality CRE, such as properties in outlying areas, outdated facilities or those with poor transportation links.
Investing in infrastructure is also a growing opportunity, Davidow says: “The most attractive opportunities are in digital infrastructure, decarbonization, deglobalization and demographics.”
There will be headwinds in some areas, but overall “we see attractive opportunities” in CRE, real estate debt and infrastructure, Davidow says.
David Israelson is a writer, editor, consultant and non-practising lawyer. He is principal of Eon Communications and Research, which he founded after more than a decade as a senior public relations executive. David contributes regularly to national and international print and online publications in addition to corporate and institutional writing across all media. He writes extensively on business, finance and investment, sustainability, conservation, energy, housing and land-use planning, international trade, travel and transportation politics and real estate, among other areas.
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