How a core-plus strategy may enhance your portfolio 

Positioning for Recovery in Private Real Estate

Principal Real Estate has been investing in commercial real estate (CRE) for more than 60 years and in core-plus real estate for over 20 years. Having experienced numerous market cycles in that time, we believe CRE values have largely adjusted for the current cycle, setting the stage for an attractive entry point for private equity investors.

Where are we in the real estate cycle, and what should investors expect?
Looking through a private real estate equity lens, commercial real estate values appear to have found a bottom in early 2024. By year-end, private equity valuations suggested we had entered the earlier stages of recovery. The primary driver of the recent value correction was the rapid rise in interest rates in response to inflation. While inflation has not yet reached the Fed’s 2% target, it showed enough progress in 2024 for the Fed to begin cutting rates in September. With constant rate hikes likely behind us, one of the key headwinds for real estate is easing.

From a fundamentals perspective, vacancy rates in most markets and property types have peaked—or are expected to peak in 2025. New development starts have declined significantly over the past 12 to 18 months, indicating reduced future new supply. This combination of stable demand and a decreasing pace of new supply supports the case for a value recovery.

If history is any guide, we may be at the start of a long period of positive returns from the asset class.

 In the past 47 years, there have only been six calendar years with a negative total return on the index, including 2024, and they have always occurred in two-year periods. Following those previous two corrections, the benchmark went on to post a 15-year and a 13-year period, respectively, where every calendar year had a positive total return, and the average annual return in those periods exceeded 11 percent. Assuming interest rates stabilize or decline and fundamentals continue to improve, it is reasonable to expect another long period of positive returns from the asset class beginning in 2025.

Why is core-plus attractive right now?
The “plus” in core-plus comes from value-add strategies like lease-up; redevelopment/development; or using more leverage than core strategies. With a slower pace of new supply for the next 12 to 18 months and expected improving fundamentals, lease-up and selective development strategies appear more viable. Meanwhile, as property returns begin to exceed debt costs again, leverage should become accretive, reversing the trend of the past couple of years when it had been dilutive.

Which property sectors and geographic markets stand out?
Price discovery has improved in most sectors, though office remains an outlier, still facing structural challenges. Industrial and retail sectors appear closest to pricing equilibrium, while multifamily has seen recent transactions at attractive yields. Niche sectors such as data centers and single-family rentals continue to show strength, supported by secular demand drivers. We tend to favor higher-growth markets for the long term that also have some supply barriers.

What about the broader macro environment?
Sticky inflation and higher-for-longer rates may persist, limiting the speed of recovery. But for well-capitalized investors, particularly those focused on income growth and with disciplined leverage, the current environment offers compelling opportunities—especially in sectors like residential, industrial, and data centers.

Final thoughts
2025 has the potential to be a strong vintage year for U.S. real estate. Core-plus strategies focused on income and income growth are particularly well-positioned. While broad-based appreciation may take time, improving market fundamentals and lower interest rates could serve as the catalyst that core-plus investors have been anticipating.

Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate.

Contact our sales team: Stef Bogaars (bogaars.stef@principal.com) or Britt Laeven (laeven.britt@principal.com)