It’s Time to Revisit Private Real Estate

Written by Peter Harano

Real estate has had a rough few years. 

After a pandemic-era boom, rising rates sent valuations tumbling. As deals unraveled and returns fell, investors headed for the exits. For many, the asset class quietly dropped off the radar.

Today, investors remain cautious. But shifting conditions could be creating an opportunity.

The same forces that drove the downturn – rates, supply, and capital flows – are slowly beginning to reverse. Construction has slowed, occupancy is recovering, and institutional investors are starting to trickle back in.

Real estate recoveries are rarely quick. But for investors able to look past the recent pain, signals suggest that the bottom could be in. 

In this piece, we’re unpacking the state of the real estate market – what happened, what’s changing, and how to think about this asset class in a portfolio today.

Setting the scene: Real estate’s boom (and bust)

Before looking at where we’re headed, it helps to understand where we’ve been.

Coming out of COVID, real estate had a compelling story. With central banks slashing interest rates, cheap debt fueled a wave of new property deals. Capital flooded in – global commercial real estate investment hit $1.3 trillion in 2021, up 55% from the year before.

For a brief period, everything looked great. Then came the post-lockdown inflation spike, followed by 525 basis points (5.25%) of rate hikes.

When the Fed raised rates aggressively in 2022, valuations plummeted across many asset classes – and real estate was no exception. Financing costs rose sharply across parts of the industry, squeezing property cash flows and investor returns. What’s more, a wave of new construction that broke ground during the boom years finally delivered, leading to stalled rent growth in key markets.

Unsurprisingly, investors pulled back. Real estate values fell roughly 20% from their 2021 highs, with sharper losses for many investors exposed to ill-timed deals.

Given this track record, skepticism about real estate is warranted. But there are signs the asset class may be approaching a turning point.

Shifting tides: What’s driving real estate’s turnaround?

No one rings a bell at the bottom. But there are signs the worst is already behind us.

Last year, the NCREIF Property Index saw both positive income and price appreciation for the first time since 2022. That performance reflects a broader turn in fundamentals:

• Supply is cooling. Construction costs soared with inflation in 2022, making new development difficult. More recently, high financing costs and tariffs have added to supply pressures. Multifamily, industrial, and retail starts are at their lowest levels in over a decade.

• Occupancy is recovering. Setting the office sector aside, CRE occupancy is recovering. Vacancy rates are at historic lows in retail, and stabilizing in industrial and multifamily as new construction drops off. This dynamic supports long-term rent growth.

• Institutional capital is returning. Large allocators like CalPERS have begun rotating back toward real estate, unlocking capital for new deals. When big money leans into an asset class, it often signals that there’s value at current prices.

When it comes to real estate recovery, history offers some useful context.

In the past three downturns – the early ’90s recession, the tech bust, and the Global Financial Crisis – investors who entered near the bottom saw annualized returns of 13% to 14% over the next five years. While past performance doesn’t guarantee future returns, that pattern is notable.

None of this guarantees that the bottom is in. Rate uncertainty persists, the macro picture is murky, and real estate recoveries are rarely a V-shaped snapback.

But for those willing to look past the recent weakness, the case for revisiting real estate is getting harder to dismiss.

Why real estate fits in a portfolio right now

Even if you’re convinced that the setup for real estate is improving, the next question is practical: why does this asset class deserve a spot in your portfolio?

Three reasons stand out:

1. Diversification that actually diversifies. Recently, stocks and bonds have been moving in lockstep – a rare and uncomfortable dynamic. Real estate tends to march to a different beat, driven by fundamental shifts in supply and demand rather than daily market sentiment.

2. An inflation hedge when you might need one. Geopolitical uncertainty and tariff pressures have put inflation back on the radar. Real estate – which features pricing power and tangible value – has historically offered insulation when prices rise.

3. Relative value in a stretched market. With elevated equity multiples and tight credit spreads, many asset classes feel expensive right now. In contrast, real estate’s post-2022 drop may offer a margin of safety that’s hard to find elsewhere.

And for tax-sensitive investors (such as high earners in states like California or New York), real estate can offer an added benefit. Income in this asset class typically carries tax advantages, often making the after-tax yield more attractive than other allocations.

Real estate may not suit every investor. However, in a world where stocks and bonds seem to rise and fall in unison, this asset class can offer a different – and valuable – rhythm.

Accessing real estate: Structure matters

Deciding to invest in real estate is one thing. Deciding how to invest in real estate is another.

Public REITs are popular due to their liquidity – you can buy today and sell tomorrow. But that convenience comes with a cost.

When you invest through public markets, you’re buying exposure to market sentiment, not just fundamentals. For investors trying to capture a recovery, that can lead to a rocky path.

Private real estate funds work differently. Your returns are tied to the actual performance of the assets, not to what the market is feeling on a given Tuesday. That means manager skill also has more room to express itself – for instance, major real estate managers have been leaning into high-growth sectors like data centers to drive recent performance.

Private funds certainly come with their own tradeoffs. They’re less liquid than public funds, with many carrying redemption restrictions (reflecting the long-term nature of the underlying assets).

But for investors taking the long view, private real estate can offer a buffer from public market swings – and entry conditions haven’t looked this interesting in years.