Economic uncertainty adds to U.S. real estate challenges

The U.S. real estate market has faced challenges over the past few years, including high interest rates, and returns have suffered as a result. The core real estate strategy (lowest risk since it relies on high-quality, low vacancy rate properties) that large pension plans generally favor has not seen returns hold up. Going forward, the Trump administration’s tariff impositions seem likely to create an uncertain macroeconomic picture and potential further headwinds for the real estate sector.

U.S. fundraising slips: U.S. equity real estate funds raised $48.4 billion in 2024, down from $58.7 billion the previous year. Distressed funds saw an increase to $4.4 billion from $1 billion while most of the other strategies experienced lower fundraising. Fundraising totaled over $120 billion in both 2021 and 2022.

Negative returns: North American real estate funds have had negative internal rates of return for five straight quarters through the June 2024 period. Core, core-plus, value-added and opportunistic strategies have had several quarters of negative IRR. Real estate debt funds have been a bright spot, including a 7.1% IRR in the second quarter of 2024.

Elevated office vacancies: Office vacancy rates remain high, edging up to 20.4% in the first quarter from 20.3% in the previous period. Multifamily, retail, and industrial properties’ vacancy rates held steady vs. the prior quarter.

Pension plans stick to core: Most of the largest public pension plans that broke out their real estate holdings by strategy for Pensions & Investments' top 1,000 plan sponsor survey had the majority invested in core real estate. These pension plans invested a range of $2.9 billion to $17.3 billion in various real estate strategies, with the majority focused on the U.S.

Sources: PitchBook, Moody's, Pensions & Investments