Welcome to Inside Real Estate Today. My name is Rich Hill. I'm Global Head of Commercial Real Estate Research and Strategy at Principal Asset Management.

We recently published our midyear 2025 outlook for the global commercial real estate market. I wanted to discuss three key themes. First, how is global growth trending in the aftermath of tariffs? Secondly, what is our outlook for U.S. commercial real estate valuations versus Europe? And third, what are our top recommendations across the four quadrants of commercial real estate investing?

We believe the impacts of tariffs have created a global growth shock. In the U.S, consensus GDP estimates have fallen to around 1.5% versus greater than 2% at the start of the year. And in the Euro Zone, consensus GDP estimates stand around 1%. In the U.S, the full impacts of tariffs will be around 1.7%, in our estimation, but they won't be felt immediately.

As a result, the U.S. is likely to avoid a recession in 2025. That puts the Fed between a rock and a hard place. We think that will lead them to cut interest rates only one time by 25 basis points towards the end of the year. By comparison, GDP in the Euro Zone will accelerate in 2026 to around 1.2% and accelerate to around 1.4% in 2027. This puts the U.S. and Europe on similar economic footing for the first time in many years.

Despite policy and geopolitical shifts, we think the commercial real estate market is on stronger footing today than at any point over the past three years. This means that private equity pricing has likely troughed, as evidenced by positive total returns over the past year or so. While a lot of this can be attributed to solid net operating income growth, we also highlight that the debt capital markets remain open and liquid.

The public markets are sending positive signals from both the U.S. and European commercial real estate markets, and in the U.S. listed rates have been resilient, with plus 2% total returns in the first half of the year. In Europe, they've done even better, with returns up 25% on a U.S. dollar basis and more than 12% on a European basis.

We think unlevered private returns in the U.S. will be around 5% or so, driven almost entirely by income returns as capital returns remain muted. Europe might be closer to 6% to 7%, given a combination of stronger fundamentals, wider cap rates, and levered returns that are attractive, given lower sovereign debt yields. Across the four quadrants, we look to the private credit markets as the most attractive opportunity.

Fundamentals will be the primary driver of total returns over the next cycle, compared to the financially engineered returns driven by historically low interest rates over the prior cycle. We believe this will make property type and market selection paramount. We see opportunities in both the U.S. and in Europe. And in fact, we believe portfolios will become more geographically diversified.

In the U.S, we see opportunities in data centers, residential across the spectrum, including apartments, manufactured housing, student housing, and single-family rental. And we also recommend senior housing. We see select opportunities in industrial and retail real estate, but it requires more nuance than previously. In Europe, we also like data centers, residential real estate, and developing logistics on the continent, as we think onshoring will be a major theme in the coming years.