White Paper
Real Estate Reset: Capitalizing on Record Dispersion

The sharp repricing of commercial real estate (CRE) across sectors and regions—triggered by steep interest rate hikes that began in 2022—marks a structural reset. This is leading to more differentiated outcomes for real estate investors.

Our analysis of commercial property valuations over the past 40+ years shows the U.S. CRE market is hitting record dispersion among the best and worst performing sectors and geographies due to divergence in rent growth and cap rates.

We believe we are in a period of sustained higher long-term interest rates. Higher rates tend to coincide with higher cap rates and increased cost of capital. This typically leads to decreased new construction, which in turn drives above-average rent growth for extended periods.

Over the last 60 years, rents have increased at significantly faster rates during higher cap rate periods. This pattern appears likely to repeat—and could be significant in certain sectors and markets.

In addition to higher rates, significant secular and structural changes triggered by technology and government policy have also contributed to performance dispersion.

Even though cap rate spreads to risk-free rates are below their historical average, we believe that average statistics obscure distinct pockets of opportunity and the potential for outsized returns.

Europe stands out as broadly attractive from a valuation standpoint, with less competition. In the U.S., as regional banks rebalance their CRE exposure, there are opportunities to participate in the recapitalization of CRE—e.g., buying debt or providing capital to undercapitalized and overlooked segments—which can lead to idiosyncratic returns.

With the prospect of structurally higher cap rates, we believe the key to outperformance will be identifying supply/demand differentials that drive rent growth and maximizing free cash flow via asset selection, entry price optimization and operational execution. 

A more volatile valuation environment with differentiated outcomes creates an ideal setting, in our view, for alpha generation.

To capitalize on the CRE structural reset, we believe investors will need to seek out market dislocations with nimble capital and structuring expertise, a global strategy with local sourcing capabilities, and a special situations orientation to capture the "complexity premium."