DOWNLOAD THE 2025 REAL ASSETS OUTLOOK
Coming into the year, we had expected a slowing of U.S. economic growth. It appears that this slowing of growth is now underway, though potentially more sharply than previously assumed. Continued uncertainty around how tariffs will be used, and whether higher tariffs will largely be a short-term component of the policy toolkit or will instead be a permanent component of trade, has hurt investor sentiment. At the same time, international developed markets—particularly European markets—have seen renewed investor interest driven by government investment programs and an easing of debt restrictions. For the first time in many years, we are looking at opportunities in Europe across infrastructure and real estate. On a relative basis, infrastructure and commercial real estate are likely to hold their values better than other segments of the equity market. Natural resources, particularly oil and gas, are likely to face headwinds from falling demand, which could provide an attractive entry point down the road.
The Real Assets Outlook includes insights around the following trends:
Commercial real estate is poised for a rebound, if the economy holds
After deploying significant capital into commercial real estate over the last 18 months, we are seeing the benefits of buying when others were pulling out. Real estate values are in recovery and likely headed for cap rate compression on a go forward basis. The U.S. economy is showing signs of weakness which will have an impact on lease rate growth, hurting the recovery in real estate. That said, on a relative basis, real estate is coming into 2025 having taken significant write-downs over the last 2 years. The prospect of falling interest rates is likely to offset some of the weakness in topline growth. We are also looking at opportunities outside the U.S. where currency tailwinds and improving economic growth have seen those markets look more attractive today than in prior years.
Now may be the time to manage risk in infrastructure
For several years, we have discussed the shift in strategy among infrastructure managers towards private equity-oriented industries and companies. With fewer regulated and monopolistic businesses available to purchase, what qualified as “infrastructure” became a moving target. In general, that trend meant taking more risk. The prospect of slowing economic growth in the U.S. market is likely to impact investments that were more reliant on business cycles than those that are defensive, regulated businesses that traditionally meet the definition of infrastructure. We would take this opportunity to build more defensive infrastructure portfolios and look outside the U.S. market.
After a brief recovery, activity has cooled across energy markets
Investors are reminded once again of the challenges of investing in oil/gas. After a brief recovery starting in 2022, the energy markets are facing headwinds again as oil prices have fallen ~20% over the past 12 months. We saw a flurry of M&A activity in the oil and gas markets in 2023 and early 2024 after several years of light transactions. Unfortunately, liquidity has once again left the market, leaving investors with fewer options for a return of capital. The good news is that if we experience a sustained period of low commodity prices, entry values will look enticing for investors who can stomach the illiquidity and regulatory uncertainty. For now, we are being patient as the industry is still healthy enough to weather this short-term downturn.
