Real estate may provide a buffer amid volatility

Bottom line up top:

• Escalating geopolitical tensions drive uncertainty higher. With the U.S. strike on Iran and Iran’s threats of response, risks of the Israel/Iran conflict spreading into a wider regional war have escalated. We expect market volatility to remain elevated, and upward pressure on oil prices to persist, which could spark additional inflation concerns. While we are not altering our portfolio construction views, we will be closely monitoring the situation and resulting market impact.

• The Fed remains patient, for now. Last Wednesday, the U.S. Federal Reserve left its target policy rate unchanged for the fourth consecutive meeting, cheering equity markets. The bloom came off the rose fairly quickly, though, with major U.S. indexes fading into the Juneteenth holiday as investors digested Fed Chair Jerome Powell’s assessment that conditions were both “highly uncertain” and represented a “solid economy with decent growth.”

  Recent economic signals have, in fact, been mixed. May retail sales data showed consumers tightening their purse strings more than expected, while the most recent consumer and producer inflation prints were surprisingly benign. But gasoline prices look vulnerable to a spike amid geopolitical hostilities, which could lead consumers to pull back even more on discretionary spending.

  A possible stagflationary combination of decelerating growth and reaccelerating inflation — two plausible results of the broad increase in U.S. tariffs announced by the Trump administration this spring — is clearly on the Fed’s mind, although expectations for future cuts have declined since the initial tariff announcements in April (Figure 1). So far, Fed policymakers have maintained their projection of two rate cuts in 2025, evidenced in their “dot plot” released last week and matching both current market odds and our own expectations, with the first of the two cuts likely coming in September.

  In an environment prone to bouts of volatility driven by macroeconomic, geopolitical and policy uncertainty, investors may want to consider allocating to asset classes that historically have provided a smoother return profile and may be more insulated from the current market turbulence. Among the areas we favor is commercial real estate.

Portfolio considerations

Following a two-year period of declines, global private real estate values have been positive for the past four quarters (Figure 2) amid diminishing headwinds for the asset class. Attractive prices, solid fundamentals and the likelihood of lower interest rates have been tailwinds. With real estate at a turning point, in our view, we continue to favor a “global cities” approach that emphasizes growing markets with educated and diverse populations.

Within the U.S. market, new project starts have dropped substantially, boding well for future fundamentals as new supply becomes less of an obstacle. Among sectors, medical office and retail have the tightest vacancies. Medical outpatient demand has continued to outpace new supply for the last three years, while consumer preferences for outpatient visits versus in-hospital care should continue to support demand.

Within retail, grocery-anchored shopping centers are particularly strong, as occupancy rates are high and new supply is nearly nonexistent. Groceries are part of the thriving “necessity retail” category, which provides goods and services like food, household staples, pharmacy and personal care items, and other everyday essentials. In 48 of the top 50 U.S. cities, vacancy rates for retail strip centers are below their historical average, according to Nuveen Real Estate Research. Moreover, we expect demographic waves of spending to further drive the retail renaissance: Middle-aged adults are the “big spenders,” and we see a significant opportunity to capture the spending power of this ascendant population over the next decade.

Within the Asia Pacific region, we’re focused on medium-term growth fundamentals and long-term structural trends. Multifamily is a highly defensive commercial property sector with an average occupancy rate of more than 97%. In Japan, the government’s decision to grant longterm residency to a wide range of skilled migrant workers will likely boost multifamily demand over the long haul. Senior living in Japan remains an undersupplied category, with a shortage of beds. Potential industry consolidation in this space could create off-market opportunities, providing additional alpha for investors. Lastly, student housing is poised to benefit from a growing Asian Pacific population of those between the ages of 15 and 19. Australia has experienced a strong influx of international students with diverse profiles.

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications