Today presents an important opportunity to rebuild allocations to core commercial real estate at what we believe is one of the best entry points for commercial real estate since the Global Financial Crisis (GFC). This is particularly true for sectors related to the interconnected new technologies all around us—what we at Ares call the “New Economy.” Christina Adamson recently sat down with Julie Solomon to discuss the real estate outlook for 2025.
Q&A with Partner and Co-Head of Ares Real Estate
CA: Ares recently made headlines announcing that it was doubling down on the buildout of its real estate platform. With the strategic acquisition of Walton Street Capital Mexico and GCP International, Ares Real Estate anticipates $100B in AUM as it becomes the third-largest industrial real estate owner/operator in the world. Why is this such a transformational milestone?
JS: Ares is building one of the most robust real estate platforms in the world that we have purposefully designed around New Economy sectors that stand to benefit from it. Those sectors are part of the shift in global supply chains, digitization, the growing demand for data centers and the need for high-quality rental housing near employment centers and universities.
For more on the New Economy sectors,
please see our latest article.
The year 2024 represented a real milestone for Ares on every metric. We have experienced record deployment, and the quality of deals is the best we have seen—as owners, developers, operators and lenders. And because we believe today’s market offers the best real estate values we’ve seen in decades, the firm is leading with action—putting its money into two large acquisitions of Walton Street Capital Mexico and GCP International. GCP will add $44 billion of AUM and brings a long history of innovation in the form of building platforms oriented to New Economy sectors, such as logistics and data centers across major geographies.1 We expect these acquisitions to cement Ares as a top three global industrial owner and operator and top three private equity real estate manager.
Scale in private real estate matters. Successful real estate investing is all about having access to the most information and the best relationships. At Ares, these advantages create a wider funnel of opportunities for our team to evaluate and execute on, producing better outcomes for our investors.
CA: 2024 marked Ares’ most bullish move into real estate to date. What is it about this next cycle that is so vastly different from the last that makes now a particularly opportune time to consider investing in real estate?
JS: This is the first time we’ve had a real estate downturn that didn’t coincide with a recession. The COVID cycle was short but coincided with a steep decline in financial markets, and the GFC was a deep recession.
During the GFC, 40 million square feet of industrial space (i.e., logistics centers and warehouses) was vacated. But during the pullback of the past two years, we saw 400 million in uptake of new space and rising rents. Similarly, in the two and a half years following the start of the GFC, multifamily rents fell by 4%, whereas rents are up by 2% in the current cycle. In 2024, we saw 550,000 apartment units absorbed —the second-strongest year on record (behind only 2021, which was boosted by the post-COVID surge in demand).2
The decline in prices (apart from office spaces) in this cycle came primarily from the speed at which borrowing costs rose, even while fundamentals in our highest-conviction sectors have remained quite strong and underlying demand has remained intact.
CA: It sounds like we’re currently at an inflection point where you believe real estate capital values have bottomed and market recovery will really take hold this year. What is the view through Ares’ lens?
JS: We believe now is one of the most compelling entry points since the GFC. From what we see, we’ve worked through the bottoming phase of the cycle, and the best assets in the highest-conviction sectors (industrial, multifamily and other New Economy sectors) have moved into the recovery phase, with the broader market expected to follow in the coming quarters.
Historically, some of the best return periods have occurred at this “inflection point” in the market where we’re pivoting into the early recovery phase of the cycle. Recoveries tend to last about five years, with full upcycles lasting on average about eight years. Over that five-year recovery period, unlevered commercial real estate total returns have historically averaged 13% per year—nearly 400 bps above the long-run return.
Real estate historically outperforms after repricing cycles
Annualized private real estate total returns:3
The supply cycle is also turning into a tailwind.4 In 2025, multifamily deliveries are expected to fall by 30% year over year (down 50% year over year in H2 2024) and should remain low through at least 2026. And since it takes about 18 to 24 months to deliver a new apartment building, we have good visibility on what’s coming over the next two years. New industrial supply is also expected to fall significantly in 2025—we anticipate deliveries to drop by about 50% year over year.
We believe that expanding our real estate capabilities at this moment underscores our view that now is the time to consider investing in real estate.
CA: Investors often know us as the preeminent private lender in the world. What are you seeing in terms of real estate private credit opportunities?
JS: Bank retrenchment has resulted in strong opportunities for private lenders like Ares to fill the “financing gap,” which is expected to be about $150 billion annually across the U.S. and Europe.5 As banks continue to face balance sheet pressure, private lenders can step in and negotiate for higher credit spreads when originating new loans. As a result, we see a unique opportunity to generate equity-like returns with downside protection in today’s market.
In the U.S., we expect a bank pullback to continue through 2025 as regional banks have significant exposure to commercial real estate loans, providing an attractive opportunity for private lenders to fill gaps. And in Europe, we have seen many opportunities in the higher-yielding space, given the smaller competitive landscape and banks accounting for more than 80% of overall commercial real estate lending.6
CA: There is a lot of energy and activity on the 42nd floor where you and the real estate group sit in Ares’ New York City office. To what do you attribute this pickup?
JS: Energy is back because transaction activity is back. This contrasts greatly with the past three years—back in Q1 2022, we slowed our deployment as we observed signs of changing interest rates and a high degree of economic uncertainty, canceling more investment committee meetings than we held. But during this time of uncertainty, we were able to take advantage of the market by maintaining positive inflows while many real estate investors faced liquidity challenges. Being prudent in our deployment to preserve dry powder also allowed us to leverage that dry powder to buy high-quality assets at discounted prices as market values reset.
Against this backdrop, we’ve become more active on the deal side over the past few quarters—deploying twice as many in 2024 than we did in 2023.
CA: If you were in an advisor’s seat and thinking about rebuilding real estate allocation for the next cycle, what would you be looking for—and how would you sort through the noise?
JS: In the competitive world of real estate, many managers have the same themes. It’s how these managers invest and execute their plans that can produce both a different investor experience and different results.
I’ll use skiing as an analogy, since we have a big ski culture at Ares. In ski racing, all competitors navigate the same course (investment theme), but their results can vary widely due to execution:
- Technique and Form: Just as skiers refine their technique to maintain speed and control, real estate investors must hone their strategies to navigate the market effectively. Precision in execution can lead to better outcomes.
- Preparation and Training: Successful skiers invest time in conditioning and practice runs, understanding the course’s nuances. Similarly, investors who thoroughly research the market and prepare their strategies are generally better equipped to seize opportunities.
- Race Day Strategy: Conditions can change rapidly on race day. Skiers who adapt their approach based on weather and snow quality often perform better. In real estate, investors who can pivot their strategies in response to market shifts are more likely to succeed.
CA: What would you leave the readers with today?
JS: As we move forward, we believe the blueprint for success has three main features:
First, success depends on carefully constructed portfolios with at least 80% of their investments in high-conviction sectors that offer the highest liquidity and highest resiliency, where experience and history can help pattern recognition for managers to move quickly.
The second feature is scale from a captive portfolio that feeds the investor real-time information, which creates a wider funnel of opportunities for the investment team. As the scale grows, this information flow grows.
And finally, success is driven by having substantial dry powder generated by prudent deployment during market uncertainty.
