Q&A: Opportunities in Commercial Real Estate in 2025 – A Matter of Perspective

• Even as inflation and interest rates finally moderate, the post-pandemic economic surge continues unfolding differently in the US and Europe.

• In the US, fueled by looser recent fiscal and immigration policies and massive AI investment, we now expect 10-year yields to stabilize around 4%; in Europe, where core countries still grapple with a raft of structural challenges, closer to 1.5%.

• In a reversal of the past, southern and periphery Europe show the most strength, with promising growth in Spain, Italy, and even emerging markets like Croatia and Romania.

• Enticing themes in more liquid markets like equities may not translate to commercial real estate, where investors don’t participate in as much of the upside.

• Accordingly, while sectors like Spanish senior housing or Italian logistics offer strong potential, Romanian data centers may be a stretch.

The macroeconomic shift that began post-pandemic now seems to have leveled off, reaching a new cruising altitude. Shorter-term rates at least are finally easing; growth has shown unexpected resilience, and robust investments – particularly in AI – are fueling strong returns in key sectors on top of potentially structurally higher rates than during the last cycle. But a closer look reveals a more nuanced landscape that varies widely across markets.

Recently, PineBridge’s global multi-asset specialist Hani Redha joined PineBridge Benson Elliott (PBBE) chairman Marc Mogull at PBBE’s annual general meeting in London to discuss these subtleties. As their conversation zeroed in on European commercial real estate, it underscored both the emerging opportunities and the critical discipline required to identify where those opportunities truly lie. The conversation has been edited lightly for brevity and clarity.

Marc Mogull: As is our tradition, I get the first question. Can you give us your view on the economic backdrop today and looking forward?

Hani Redha: Sure. There’s been a regime shift that started after the pandemic, leading us to a world of higher nominal growth, higher inflation, and higher interest rates – a new normal likely to deepen over the next few years. This is fueled by massive investment activity that simply didn’t exist before: energy transition, supply chain restructuring away from China, increased defense spending to address security threats, and AI, or rather, a whole new level of compute capability with applications far beyond what we’ve seen so far. This is all capital that wasn’t there before and is taking up substantial resources. Ultimately, where interest rates settle depends on the balance of savings and investment, and we are really just pumping up the investment side of the scale, creating this higher interest rate environment.

Mogull: So, when you see US 10-year yields above 4%, you don’t think the market is pricing them too high?

Redha: I don’t. If I had to give a round number, I’d expect 10-year yields in the US to settle around 3%-4%, but likely closer to 4%. That’s versus about 2.3% on average in the last cycle.

Mogull: I was on the tube this morning and saw that the S&P hit another high. Thinking about those demand drivers and their impact on asset prices beyond our sector, how much of it is hope value tied up in the AI phenomenon? And could there be a risk of a cold shower down the line?

Redha: Paradigm shifts like this are a bit of a Wild West. With so much capital being deployed, some will be misallocated. But the lesson from these episodes is not to discount the shift too quickly. There’s real cash flow behind all this. What’s interesting is that, unlike past technology shifts led by smaller, riskier companies, today’s leaders are the big tech firms with already incredible cash flows. They’re exploring how this new compute capability will add even more. For investors, that’s a very different risk-reward than what we’ve seen with past tech breakthroughs.

Mogull: And to think that only 18 to 24 months ago, many were sure the US was headed for a recession.

Redha: Right. But now, between the surge in investment, the past few years of loose fiscal policy, and an unprecedented wave of immigration, it looks like the US will weather the next few months of weaker growth and extend this cycle – despite the impact of now-easing but still high interest rates.

Mogull: That’s all good and interesting for the US, but let’s shift to Europe. What’s your analysis for our part of the world?

Redha: Europe has some serious structural challenges, especially with demographics. It’s not new, but it’s a persistent issue. Inflation here is somewhat stronger than in past cycles, but it’s not the same as in the US. The 10-year bond yield in Europe averaged about 1% in the last cycle, and we expect it might average closer to 1.5% over the next few years.

Mogull: Can you give us a brief overview of the unique challenges in Germany?

Redha: In short, Germany’s model was built on demand from China, powered by Russian energy, and a highly competitive workforce. Now, China’s in a very different growth scenario, Russian energy is off the table, and labor costs are far higher, so competitiveness has declined. I wouldn’t count Germany out – they’ve rebuilt before, certainly – but it will require a fundamental re-gutting.

Interestingly, it’s southern Europe that’s showing strength. In Spain, for example, there’s been significant investment and immigration, with GDP growth projected to be twice the EU average over the next few years. I know your team has been looking at opportunities in Spain’s real estate sector. Italy is also doing well, partly due to the next-generation EU funds they’ve been investing effectively. Plus, there’s been some political stability with Meloni’s government. So, the south and periphery are looking far more positive than the core, and that’s where I would turn this around and ask how else you see this impacting your opportunities.

Mogull: We have a unique issue that listed sectors don’t face: liquidity. You can buy a bond on Monday and sell it by Wednesday, or buy a stock and then just change your mind. We can’t do that, so liquidity is a huge consideration for us. You mentioned the periphery – growth in places like Croatia and Romania – which is promising. But in real estate, the liquidity in these locales is like a leap year – there some years, but often not. Given how cyclical our business is and the importance of timing entries and exits, we have to focus on markets where both growth and liquidity prospects look solid for the next four, five, or even seven years – where there’s a deep enough pool of domestic institutions playing in those markets.

Redha: And I suppose that parallels some of the thematic trends in listed markets, like data centers and life sciences.

Mogull: That’s right. As landlords, we’re essentially in a debt position. To use another extreme example, would you want to be a landlord to a venture capital fund’s portfolio companies? Out of 10 investments, one might break even, one might appreciate 20x, and the other eight fail. If I have a building with those 10 tenants, only two may pay their lease, while the other eight give me back their space. I’m not saying the data center boom is exactly the same, but there are risks. In leasing a data center to a company like Amazon I’m not worried about them going bust. But compared to other opportunities we’re focused on, I’m still exposed to the downs without owning much of the ups. Fortunately, the corporate sector overall is in a fundamentally better position than it was at the start of the last cycle, after the global financial crisis. It’s fundamentally less leveraged. I think that’s another message we need to appreciate and remind people of.

Redha: Agreed.

To hear the full conversation between Marc and Hani, listen to the Navigating Macro Trends Impacting the Future of Commercial Real Estate podcast.