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A new cycle emerges
Heading into 2025, there is renewed, albeit cautious, optimism that the real assets sector is moving into a new growth cycle. Responses to PwC’s Emerging Trends in Real Estate® 2025 survey indicate 65% of participants believe profitability will be good to excellent in the year ahead, a sharp improvement from 41% in 2024. As investors gear up for an expansionary phase of the cycle, market participants must still navigate a unique environment.
- New regulatory regime: With the uncertainty of the election in the rear-view mirror, market participants are anxious to gain clarity on what policies the new administration will enact. Tariffs were a headline topic of the campaign, and if enacted may signal momentum for onshore manufacturing. In turn, this could benefit transaction activity in the industrial sector, particularly in markets with supportive infrastructure.
- Interest rates remain elevated: While the Federal Reserve began reducing its benchmark rate this past fall, future reductions will likely be more gradual. Moreover, the 10-year Treasury bond yield rose, rather than fell, after the Fed's rate cut, leaving borrowing costs higher than many hoped to spur deal activity. Add to that the possibility the rate cuts reflect a slowing economy, and it is likely dealmakers will remain increasingly selective and cautious, focusing on markets with sustainable growth and returns.
- Deal volume edges back: Through October 2024, total US transaction volume increased 0.2% year-over-year to $316.2 billion. This is a marked improvement from earlier in the year when volume was nearly 11% below the prior year as of Q1 and approximately 2% below prior year as of Q2. This positive momentum is likely to continue given expectations for further cuts in borrowing costs and increased asset price transparency as more deals close.
As investors become more confident in potentially fewer regulations, lower interest rates and more durable asset prices, we are optimistic the year ahead can provide a significant opportunity for capital to be deployed across sectors and markets alike.
Investors search for returns in new asset classes
The current environment presents a fertile landscape for corporate development and M&A strategies within the real assets sector. Despite the challenges in global commercial property deal volumes, encouraging signs of recovery are redefining deal flow and investment approaches.
One key positive indicator: the narrowing gap in price expectations between buyers and sellers. A smaller bid/ask spread makes it more likely a deal will be quickly reached, further reinvigorating transaction activity. Public markets reinforce the idea that a new cycle is beginning — the MSCI Liquid Real Estate Indexes reflect an upswing in asset performance. This upswing signals that a diverse pool of investors is growing more confident that the worst of the downturn is over.
Accelerating megatrends like digitalization and the global efforts to enhance energy security and sustainability are creating new investment opportunities in real assets. The surge in demand for data centers and digital infrastructure — powered by artificial intelligence computing and increasing data needs — offers significant growth prospects. Investors with the expertise to execute complex projects in this space are well-positioned to benefit.
Power remains a key constraint in the data center industry, making integration with energy infrastructure asset managers an appealing strategy. However, regulatory challenges like zoning, energy market rules and environmental compliance add complexity but also create opportunities for innovative investors to unlock value. Furthermore, real estate funds focused on senior debt and whole loans have outperformed traditional equity strategies, highlighting the appeal of stable returns in the current high interest rate environment. Regardless of recent rate cuts, the prevailing sentiment is that further reductions will be gradual, with rates expected to remain higher for longer. The favorable performance is attracting investors who are exploring diverse financing options, including private capital and insurance-backed funding, which can facilitate deal-making and support corporate growth objectives. These dynamics highlight the growing reliance on the collateralized mortgage-backed security (CMBS) market, life insurance company funding and private capital to finance deals, underscoring their critical role in sustaining transaction activity as traditional banks remain on the sidelines.
As an industry that relies heavily on leverage to get deals done (or simply boost returns), commercial real estate reflexively appreciates low-cost debt — and the lower, the better.
“It’s a dynamic time for the real assets industry. Retail focused capital raising, new asset classes and transformative operating models bring challenges but also incredible opportunities.”
The bottom line
The next 12 months appear to be primed for capital deployment now that the election is behind us, regulatory relief seems highly likely and interest rates appear to be headed even lower. Those factors, as well as greater clarity about the operating environment and price discovery, can help align pricing expectations between parties. While these factors should increase deal volume, that doesn’t mean investment returns on those deals will rebound to historical levels. Investors will need to be more discriminating about the valuations they’re paying given interest rates are higher than they were over the prior 15 years and the operating environment is increasingly complex. A greater focus on value creation and operational excellence is needed to generate returns that rival those of the halcyon days when interest rates were low and both economic growth and inflation were stable.
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