Cushman & Wakefield is providing perspective on today’s capital markets in its recent report, “Market Matters.”
Quick Bites From the Report:
- The Macro Outlook remains cautiously optimistic. Policies of the new administration add uncertainty and headwinds to growth prospects; however, these new policies are more likely to shift the pace and inner workings of economic growth rather than threaten or undermine it entirely. Economic growth is set to slow from the above-trend pace registered over the past few years, but a recession scenario is not currently outlined as our base case.
- Inflation has been stuck hovering near 3%, above the Fed’s 2% target. Impending policy changes (particularly trade protectionism and immigration) add upward inflationary
impulse to the outlook. - Monetary Policy & the Dual Mandate: The Fed will remain patient. Ongoing rebalancing in the labor markets should allow for further easing in policy later in ‘25.
- Credit Spreads: Financial market volatility is to be expected, and credit spread expansion is underway as markets react and digest. Credit spreads are still tighter than historical averages, which is a green shoot in one sense and a warning signal in another – further credit spread expansion (even just reversion to mean) would increase debt costs and dampen the capital markets recovery.
Key Themes: A New Cycle Is Upon Us
- Recalibration: The CRE capital markets are cyclically evolving and adapting to a normalized interest rate and yield environment. That adaptation and adjustment process has not been pleasant for valuations, nor has it been as swift as many would hope, but we are two years into the process, and market participants across the full spectrum of the capital and debt markets are finally recalibrating their strategies for this next investment cycle.
- Shifting tides, despite ongoing macroeconomic uncertainty: While it may feel counter-intuitive, we still expect the CRE capital markets recovery to progress (albeit gradually) despite the chaotic political policy landscape and decelerating macroeconomic
backdrop. Check out Abby’s latest piece, titled “Tide is Turning: U.S. CRE Debt Markets are Re-Engaging” for a summary of key inflection points and forward-looking strategic implications. - Perspective on what we’re recovering from to help justify where we’re headed: the required market adjustment to normalized interest rates caused the most recent monetary-policy-induced CRE capital markets downturn. Recovery from that recalibration process can (and will) unfold gradually even as we face a deceleration in economic growth. Now, if the economy were to dip into a recession (not our current base case), the capital markets recovery would stall out, but that again would be a cyclical dynamic that would simply be interrupting or delaying the recalibration process already underway. Indeed, some of the momentum felt in late ’24 has retreated as the Fed and the market-at-large adopt a bit more of a wait-and-see mode to allow the policies of the new Trump Administration to unfold. It is best to think of the near-term outlook as a gradual sequential shifting tide rather than a rushing current.
backdrop. Check out Abby’s latest piece, titled Riding the Waves of Megatrends: Shaping the Future of Secular Growth
While the near- and medium-term outlook remain critical to asset management and investment strategy, it’s important not to get so swept up in the daily minutia of fluid economic policy, media, and financial markets that it becomes a complete distraction to the myriad of lasting themes that will transcend each subsequent political administration.
In addition to maintaining a high-frequency pulse on prevailing capital markets conditions, we are also keenly focused on the longer-term trends that will shape institutional portfolio strategy throughout the built environment in the years to come. Investment strategies are increasingly adopting a thematic approach, geared toward the secular forces reshaping demand-side tailwinds. These include aging demographic trends, evolving consumption patterns, shifting consumer behaviors, technological advancements, and changes in data storage and usage.
Below, we highlight a few key thematic megatrends that continue to build momentum and inspire confidence among investors across both traditional and emerging alternative CRE sectors:
Aging Demographics: Consider the aging Baby Boomer generation. The fastest growing age cohort over the next decade will be seniors, and the U.S. population over 75 years old is projected to increase by over 33% by 2032 (see Chart 1, which follows the progression of population growth by year by age cohort over time). This aging cohort is fueling demand for senior housing across the continuum of care—independent living, assisted living, memory care, skilled nursing, hospice, etc. With pandemic-related disruptions fading, senior housing has recovered, and rent growth is gaining momentum. The sector faces more room to run, as well, as senior housing is set to experience surging demand over the next 20 years. By our estimates, the U.S. will need to add approximately 35,000 senior housing units annually through 2045—well ahead of the current pace of roughly 25,000 units.
Medical outpatient buildings will be buoyed by the aging U.S. population as well, as over a third of all healthcare spending, including government and personal expenditures, is done on behalf of citizens over 65 years old. For investors with an understanding of the regulatory, operational, and development challenges in these spaces, the opportunities are substantial.
Lack of Housing Affordability: As Boomers age, the largest generation in the U.S. is now Millennials, who are aging into their 40s. This generation is entering their prime homeownership years (Chart 2), but single-family affordability constraints continue to challenge their ability to buy, thereby supporting the case for traditional multifamily demand in the chapter ahead. In addition to traditional Multifamily, Build-to-Rent (BTR) housing is helping to fill this gap by providing single-family-style homes with modern amenities, along with the convenience of renting.
The 40- to 49-year-old age cohort population is expected to grow by more than 10% in the U.S. this decade, making it the fastest-growing age group outside of the 65+ category. These households are gravitating towards both traditional Multifamily and BTR properties. Institutional interest in this asset class is growing, though opportunities for BTR properties will largely come from new development, creating unique opportunities—and challenges—for investors.
Cloud Computing, Technology Adoption & Advancement: The explosion of cloud computing, artificial intelligence (AI), and digital tools has sparked near-insatiable demand for high-quality data centers. With AI’s growing influence in the data center industry, global AI colocation demand is expected to increase from $2.2B in 2024 to $36.7B in 2029. Undersupply conditions for existing data centers have sent hyperscalers and colocation providers toward new development which has caused data center construction pipelines to explode.
Investors seeking exposure to the digital economy are increasingly allocating capital the Data Center alternative sector, even as the sector wrestles with power, infrastructure, and permitting challenges. Capturing this momentum in the Data Center segment means not only understanding the geographies driving demand—such as the established U.S. hubs of Northern Virginia, Dallas, and the Pacific Northwest—but also recognizing the rise of emerging markets across the heartland. Equally important is a deep understanding of the technical complexities that define this highly specialized asset class.
Investor preferences are shifting to align with the resilience, counter-cyclicality, and long-term growth prospects offered from secular tailwinds and through alternative/niche sectors.
- Open-End Diversified Core (ODCE) fund allocations toward alternative sectors have grown steadily, rising to 9.1% in 2024—a dramatic increase from just 2.7% five years prior. This consistent shift toward alternative sectors reflects not only their resilience during market downturns but also their alignment with long-term structural trends.
- Fundraising for dedicated niche-focused vehicles has grown 87% in the post-pandemic era (2020–2024) compared to pre-pandemic years (2017-2019). However, it’s important to note that a large portion of alternative sector investment is channeled through Diversified funds as well, which have captured upwards of 70% of fundraising since 2020, as opposed to specifically mandated, sector-defined funds.
- Meanwhile, if we look beyond capital flows and focus on transaction activity, niche properties account for approximately 22% of all transaction volumes, a meaningful climb from the long-run average and evidence of their growing prominence.
Apart from the choppiness of the near-term outlook, the CRE capital markets are entering a dynamic new chapter, defined by evolution and recalibration. The near-term outlook is increasingly uncertain, and unfolding economic policies have the potential to exert upward pressure on inflation, complicating the Fed’s job. Yet, the economy and CRE has proven its resilience to a broad spectrum of political administrations and economic policies in the past. It is important to steer through the daily minutia and whipsaw of the financial and political policy environment and remain focused on the tailwinds underlying aging demographics, shifting consumer preferences, and technology adoption that will continue to reshape business, consumer, occupier, and investor demand. Focusing on the themes that will transcend cycles and drive evolution throughout the built environment will serve investors over the long run.
This issue of Money Matters is authored by Abby Corbett, Senior Economist and Head of Investor Insights. Investor contacts contributing to this report are Miles Treaster, President of Capital Markets, Americas, and Kristina Wollan, Managing Director of Investor Services. Read more from Cushman & Wakefield.
