Once in a Generation – Feb. 3, 2025
JPMorgan Asset Management’s seventh annual overview of global alternatives covers a wide spectrum of macroeconomic factors and their implications for alternative investments. A recurring theme is the appeal of real estate, for which the overview’s authors see “a generational investment opportunity” emerging as valuations appear to be bottoming out for many sectors.
The overview cites the pro-growth implications of the new administration’s policies, which include “meaningful tax reform” along with “an aggressive deregulatory agenda.” This could bolster net operating income growth for real estate sectors, according to the overview.
“Solid profitability could encourage executives to plan for growth and sign longer-term leases, a welcome tailwind for the beleaguered office sector,” the overview states. “The extension of the 2017 [Tax Cuts and Jobs Act] tax cuts for individuals should help consumer spending, which would help real estate performance across most sectors. If the state and local tax (SALT) cap is lifted as part of a broader tax reform package, outmigration of residents from higher tax, high cost-of-living coastal markets could ease.”
Conversely, another Trump policy initiative could result in higher costs, and not only in coastal markets. That initiative is tariffs, which the JPMorgan Asset Management team notes could range from a 10% universal tariff to a 60% levy on goods imported from China. The result could be a rise in personal consumption expenditure inflation to 2.7% year-over-year by the fourth quarter of this year before drifting down to 2.1% by the end of 2026. The ripple effect of such inflation may be felt across “numerous countries,” according to the overview.
Yet this disruption has favorable implications for at least one commercial real estate sector: warehouses. “The prospect of higher future prices and supply chain disruptions could result in inventory stockpiling in the near term, benefiting industrial real estate and transportation,” states the overview. “Companies focused on building resilient supply chains are likely to place greater emphasis on last-mile delivery, logistics and domestic warehousing in order to be positioned closer to end consumers, to store goods for longer periods and to ensure that products can reach consumers even in the face of global uncertainties.”
Indirectly, inflation can work in favor of other sectors as well. Just as utilities are contractually able to raise rates in response to increased costs, “operating costs [in real estate] are typically passed through to renters via rent increases,” according to the overview. “In addition, the same economic growth that pushes up interest rates also increases property revenue, offsetting the negative effects.” This dynamic bolsters real assets’ standing as a hedge against inflation.
One aspect of pricing that represents a headwind for commercial real estate is borrowing costs. The overview cautions that the “amend and extend” practice currently in vogue for outstanding CRE loans presupposes a lower-rate environment that may never arrive. It’s especially risky with office loans or debt that was originated at the peak of market pricing in late 2021 through early 2022.
“More broadly, higher base rates influence capitalization rates that are used to value commercial real estate and acquisition financing costs, which could lead to lower transaction volumes and slow the recovery in property values,” the overview states.
On the other hand, those higher acquisition costs also apply to residential mortgages. That means ongoing household demand for multifamily and single-family rentals.