2025’s Choicest Asset Classes — Starting With Single-Family Rental

With bond markets well off recent troughs and equity markets up roughly 50 percent in the last two years, private real estate, which is still down by approximately 25 percent from its peak, represents one of the best relative value opportunities of the major asset classes. However, although fundamentals are sound and the sector is well positioned for future growth, there are strategies that should outperform, providing investors with even better return prospects.

We believe the residential sector will be a top performer going forward. A housing shortage, estimated by the National Association of Realtors to be as high as 5.5 million homes, along with construction starts that are at the lowest levels in over a decade, have set up one of the most favorable supply-demand dynamics of the major sectors. 

Within the residential space, our highest-conviction strategy is single-family rentals. As millennials age into their peak family formation years, they are looking for many of the same housing attributes as the generations before them. They want more space, greater privacy, good schools and a yard for the kids to play in, which many single-family rentals provide. 

What these rentals do not come with is the hefty down payment, elevated mortgage rate, property taxes, maintenance expenses and transaction costs of owning a home. With for-sale housing prices at all-time highs and affordability near the lowest levels since the 1980s, many would-be owners are getting pushed into rentals, driving the outperformance of the subsector.

Suburban apartments provide many of the same characteristics as single-family rentals, but with a more attractive price tag. With a strong anti-development sentiment in many suburbs and the demographic tailwinds provided by aging millennials, these locations and assets deliver more favorable supply-demand trends than can be found in most CBDs. This should keep suburban multifamily assets as one of the better-
performing investment opportunities in the residential space.

Regardless of the location or subsector, we continue to favor nonsubsidized assets with rents that are obtainable for middle-class families. The sharp run-up in residential rents during the pandemic has stressed the budgets of many households, driving people toward more modestly priced units. However, given high land values and elevated construction costs, the supply of more affordable housing is limited. As a result, existing assets should continue to benefit from growing demand and limited competition, making them a top investment choice.

Industrial investments also offer an attractive opportunity, and here we favor all forms of infill assets. This includes the more traditional port-proximate assets in Southern California and New York-New Jersey, where large population bases, supply constraints and their critical role in the national logistics network have all contributed to outperformance. However, the continued growth of e-commerce sales has made infill assets across all markets more attractive as well. Given the continued shift toward direct-to-consumer sales, these assets and locations are needed to meet the condensed delivery timelines of online orders and should continue to grow in popularity.

Two additional industrial subsectors that are particularly compelling are truck terminals and outdoor storage assets. Getting packages delivered in two days or less requires the use of more trucks. As both asset types are crucial in loading, parking and servicing these vehicles, they are becoming an increasingly critical link in the logistics chain, have some of the lowest vacancy rates in the industry, and should continue to outperform in the years ahead.

Within the retail space, grocery-anchored centers should remain top performers. These centers tend to have more exposure to necessity- and service-based tenants that help insulate them from e-ecommerce competition, and their convenient locations make them ideal for picking up essential items. These traits should keep demand high and performance healthy. On the other end of the retail spectrum, trophy malls continue to benefit at the expense of lower-quality centers. The elevated foot traffic and high-quality shopping experience they offer make them a favorite of shoppers and tenants alike, giving them some of the lowest vacancy rates and best go-forward prospects of all the retail subsectors. 

There is a lot to like about real estate markets, and we continue to believe that now is a generational buying opportunity for the sector. Investors that act quickly and concentrate their efforts on the sectors, subsectors and strategies mentioned previously are likely to benefit most from the current pricing dislocation.

Chad Tredway is head of real estate for the Americas at J.P. Morgan Asset Management.