Following several quarters of consecutive positive returns, core private real estate could deliver long-term returns that could thrive even through the current volatility driven by war and policy uncertainty, according to Josh Pristaw, president of Clarion Partners.
Pristaw, who joined the Franklin Templeton-owned private real estate investor last year, told Institutional Investor that healthcare real estate, industrial, essential retail, and housing have solid fundamentals to provide strong, long-term returns.
“We’re focused on sectors with long-term structural tailwinds,” Pristaw said. “The volatility around core private real estate is relatively low, particularly with all the craziness going on in the world.”
Other real estate managers are seeing private real estate make a comeback after years of underperformance — particularly student and senior housing. “This is the time when you need hard assets in good and bad times,” Christopher Merrill, co-founder and global CEO of the student and senior housing specialist Harrison Street, recently told Institutional Investor.
Ultimately, the demand for areas, such as senior housing beds, is inevitable, regardless of interest rates (the same goes with industrial). Likewise, a national housing shortage and a large millennial population are driving up demand for housing, even with the war in Iran. Essential retail or necessity-based retail — which is any e-commerce-resistant retailers that provide goods and services for everyday life, such as grocery stores, pharmacies, or hardware stores, for example — is also dealing with an almost complete dearth of new supply.
Valuations are also attractive: After seven quarters of positive private real estate returns, it “seems cheap on a relative and absolute basis,” according to Pristaw. In addition, fundamentals (vacancies, construction starts, construction deliveries) are strong, which signals rent and cashflow growth. The authors of recent research from Clarion argue that resilient demand and falling supply because of large demographic shifts are underpinning the fundamentals for most of these types of properties, which could result in the start of a new commercial real estate boom.
“Sectors driven by demographic shifts and innovation, particularly housing, industrial, and alternative sectors, are positioned for above-average performance; more differentiated performance by property type and geography should continue,” wrote Clarion’s global head of research and strategy Indraneel Karlekar.
For example, in healthcare real estate, sustained demand from a massive Baby Boomer population and evolving patient needs are driving compelling opportunities in senior housing, which has outperformed the expanded NCREIF Property Index by roughly 210 basis points per year for the last 20 years. Clarion’s healthcare real estate team has delivered $1 billion in single-asset transactions so far this year.
Meanwhile, business job growth and consumer spending is driving “strong demand for industrial in certain sectors,” according to Pristaw, adding that this demand ranges from third-party logistics to data center-adjacent uses to robotics.
So far this year, Clarion has leased more than 7 million square feet in the U.S., a record for the firm. Clarion’s U.S. activity includes 35 new logistics and distribution leases in such markets as Dallas/Fort Worth, Lehigh Valley, Indianapolis, Inland Empire, and New Jersey.
Pristaw did concede that while demand is up while interest rates have come down, they are still above pre-spike, making new investments challenging. But ultimately he sees real estate as the “epitome of the halo investment strategy.”
“Things like warehouses, apartments or homes, medical offices, shopping centers, they can’t be disintermediated by AI,” he said. “People still sleep in beds, these goods still have to show up in a warehouse.”
U.S. commercial real estate has been volatile over the past five years, driven by post-pandemic demand shifts, a brief zero-interest-rate period, and rapid monetary tightening. Looking ahead, J.P. Morgan Asset Management’s head of real estate investment strategy Tom Kennedy argues the next five years will bring a pickup in transactions and valuations, slower e-commerce growth, and a possible spring for the office sector after a long winter.
