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More Nuanced Investing as the Next Upcycle Begins
We see compelling investment opportunities from a volatile and asynchronous macro and capital markets environment. We believe real estate returns are likely to turn positive following two negative years, boosted by stable or lower yields and net operating income (NOI) growth. Wider performance dispersion between "haves" and "have nots" is likely as occupier and investor preferences further narrow.
What we are seeing
As the global macro-economic environment continues to improve, the case for real estate investing has become more compelling. After a period of moderation and stabilization in 2024, we believe that 2025 will see a transition into the next upcycle. Inflation is trending down, interest rates are falling, and valuations are troughing. Equity markets, including public real estate investment trusts (REITs), are up materially over the last two years, yet private real estate valuations have been recovering slowly. Occupier demand remains uneven within and across all real estate sectors impacted by the economic cycle and longer-term structural trends.
Supply levels in most markets and sectors will be lower due to a pullback in construction starts because of elevated costs, expensive debt financing and lower sale prices. Transaction activity is increasing due to a more constructive market outlook and greater availability of debt financing. Selective situations with ongoing seller pressure to deleverage should create interesting opportunities to deploy capital into recapitalizations and structured credit investments.
What we are doing
We will look to capitalize on e-commerce sales growth and acquire or develop core industrial assets in supply-constrained, high-growth markets as well as seek opportunities to take leasing and repositioning risk in urban infill assets. Additionally, we will capitalize on supply chain shifts to acquire highly functional industrial assets in key global manufacturing clusters. We will seek opportunities to acquire, renovate or develop existing multifamily, single-family rental and student housing product in undersupplied housing markets. We will continue to use existing relationships to source and aggregate unleased and under-rented assets in Japan and monetize them following asset management execution.
We will continue to invest in high-quality senior housing assets at attractive yields with operational upside. We will evaluate hotel investments that provide attractive initial yield and the opportunity to drive performance through asset management. We are looking at opportunities to acquire assets from—or provide capital solutions to—public companies, funds, and private owners in need of liquidity. We are pursuing high-quality assets that meet the narrower definition of "core" being adopted by occupiers and investors.
We are also seeking to leverage our asset management expertise to drive income growth including environmental, social and governance (ESG) retrofit opportunities to optimize energy efficiencies. We will invest accretively into our existing assets and deploy capital into our core operating platforms such as residential, self-storage and student housing.
We are executing sale leaseback transactions with occupiers given their relative attractiveness as an alternative source of financing and evaluating opportunities to acquire long-term leased assets benefiting from secular and demographic tailwinds.
What we are watching
We are monitoring geopolitical, economic, inflation and interest-rate signals. We are on the lookout for signs of distress or forced selling from pending debt maturities. We have our eyes on global dislocation, demographic shifts, supply chain reconfigurations and divergent recovery cycles by region, market and sector. We are observing shifts in structural demand drivers and how they impact occupier preferences, such as on-shoring/near-shoring, ESG, artificial intelligence and aging populations. We are paying close attention to investor sentiment, allocation trends and strategy preferences.
1 Urban infill assets are vacant or underutilized parcels of land in urban areas that are developed for construction.
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Risk considerations: Historical performance information is not indicative of future results. Alternative investments are speculative and include a high degree of risk. Investors could lose all, or a substantial amount, of their investment. Alternative instruments are suitable only for long-term investors willing to forgo liquidity and put capital at risk for an indefinite period of time. Alternative investments are typically highly illiquid—there is no secondary market for private funds, and there may be restrictions on redemptions or the assignment or other transfer of investments in private funds. Alternative investments often utilize leverage and other speculative practices that may increase volatility and risk of loss. Financial intermediaries are required to satisfy themselves that the information in this document is suitable for any person to whom they provide this document in view of that person's circumstances and purpose. Morgan Stanley Investment Management (MSIM), its affiliates and its and their respective directors, officers, members, partners, employees, agents, advisors, representatives, heirs, and successors shall have no liability whatsoever with respect to any person's or entity's receipt, use of or reliance upon this document or any information contained herein. If such a person considers an investment, she/he should always ensure that she/he has satisfied herself/himself that she/he has been properly advised by that financial intermediary about the suitability of an investment.
ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.
Real estate investments are subject to risks similar to those associated with the direct ownership of real estate and they are sensitive to such factors as management skills and changes in tax laws.
Disclosures
There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively "the Firm") and may not be reflected in all the strategies and products that the Firm offers.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.
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