Quarterly Market Review - Q2 2025

Although the 2nd quarter of 2025 started with volatility, equity investors were rewarded for staying the course as the S&P 500 posted a staggering 10.94% return. The index reached record highs as markets have been digesting the news around U.S. trade and fiscal policy and have largely dismissed initial concerns. Fixed income investors also had a fine quarter with the Bloomberg U.S. Agg Bond Index returning 1.21%. Core commercial real estate is building momentum, with the NFI-ODCE index posting its fourth consecutive positive quarter. Although returns are still below the long-term quarterly average, real estate is becoming well positioned to outperform many traditional assets forward, especially with the long-term rates likely to stay in this range and equity multiples at 23x earnings.

Core commercial real estate has long been a favored asset class because of its stability in returns, low correlation to the broader markets, and its ability to deliver positive returns in an inflationary environment. The features of the asset class are even more important to consider today, especially as the asset class recently suffered a historic drawdown due to the pace of interest rate increases, making it a potentially optimal entry point. Now that the asset class has stabilized (4 quarters of positive returns, albeit slightly positive), and because traditional asset classes sit at historic highs, we believe real estate is likely to outperform in the coming quarters. When considering interest rates, at this point, even if inflation is stickier than the Fed has hoped, the likelihood of a substantial increase in rates from here is relatively low. They are more likely to keep rates at the current level and ultimately decrease rates. The June “dot plot” indicates two rate cuts by the end of 2025, with markets also anticipating two cuts this year, potentially starting in September. The points below should be considered in the current environment.

• In an environment where inflation will likely stay above the Fed’s 2% target, commercial real estate should deliver strong returns given the ability for managers to increase rents. Additionally, as long-term rates seem to be stabilizing, and short-term rates are likely to decrease, that should provide more tailwind for the asset class.

• Both multi-family and industrial are well positioned to experience continued appreciation. As higher rates have dramatically reduced starts, current stabilized assets should do very well in this environment. We have seen some softness in industrial assets located in southern CA due to trade uncertainty, however that is likely to abate over the next couple of quarters. Throughout the rest of the country, we are seeing continued appreciation.

• Retail assets have seen appreciation over the past year, which continued this quarter. This again is a reminder that markets change quickly and why it is important to stay diversified. Just a few short years ago, it was difficult to avoid the articles about the demise of retail and today it draws some of the highest demand across the industry.

• Office values continue to face pressure, but most NFI-ODCE funds reflect fair values after taking write-downs of more than 40%. Given leasing demand is picking up in many cities, we believe Class A office will begin to appreciate without further significant decline.

• As it relates to the impact of tariffs and immigration, the impact on real estate is still unknown, however it is likely to be a net positive. Less immigration, an increase in the prices of building materials, and a higher cost of financing will increase the replacement cost of commercial real estate and keep new development muted. This again supports the case for stabilized assets in the current environment.

Outlook

Now that we have seen stability in returns for the past several quarters, and given the economic backdrop, we expect returns to strengthen from here. Historically speaking, limited new supply, a resilient economy, slightly elevated inflation, and the likelihood of interest rates holding steady or decreasing have all been positive for commercial real estate. Of course, if a recession takes hold, commercial real estate could see a period of muted returns, however we believe the asset class is much more attractive on a relative basis than equity markets (multiples remain well above average) or fixed income markets (credit spreads remain tight).

Recently, a major real estate interval fund announced plans to convert to a listed closed-end fund, trading on the New York Stock Exchange citing a desire for offering increased liquidity. However, we believe this liquidity will likely come at a significant discount to net asset value (NAV) unlike redemptions in an interval fund, which are purchased at NAV. While rising interest rates and reduced transaction volume have certainly impacted real estate market liquidity, the proxy's described "Liquidity Mismatch" likely stemmed from the fund's illiquid, non-core investments, not the interval fund structure itself or core commercial real estate in general. We continue to believe the interval fund structure offers substantial benefits provided that valuations accurately reflect asset values, and investors fully understand their holdings. If you appreciate the interval fund structure, and you are exploring new private real estate strategies, we encourage you to reach out to us.

Definitions

Correlation is a statistic that measures the extent to which two asset classes (or securities) move in relation to each other. Two asset classes that have a high correlation move in the same direction as markets rise and fall. Two asset classes with negative or inverse correlation move in opposite directions as markets rise and fall. The closer the correlation statistic between two asset classes is to zero, the more independently the asset classes move with respect to each other.

Bloomberg U.S. Aggregate Bond Index is an unmanaged market value-weighted index for U.S. dollar denominated investment- grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year.

MSCI US REIT GR Index is a free float-adjusted market capitalization weighted index designed to capture the large, mid and small cap segments of the US equity universe. All securities in the index are classified in the Real Estate sector according to the Global Industry Classification Standard (GICS®).
NCREIF Fund Index — Open-end Diversified Core Equity (NFI-ODCE) consists of private real estate equity funds that meet certain criteria with respect to such things as leverage (less than 35%), operations (at least 75% invested in properties that are 75% or more leased), sector and geographic diversification, and investment in core real estate (at least 75% in office, industrial, residential and retail properties).

S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Past Performance is no guarantee of future results. One cannot invest directly in an index.

Risk Disclosures

Union Square Capital Partners, LLC is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Past performance does not guarantee future results.

There are a number of significant risks that should be considered when considering an investment in real estate or real estate related securities. No amount of diversification or correlation can guarantee profit or prevent losses. This website is neither an offer to sell nor a solicitation of an offer to buy any securities. An offering is made only by the applicable offering documents or Prospectus and only in those jurisdictions where permitted by law. This website must be read in conjunction with the applicable offering documents or Prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates and a copy of the offering documents or Prospectus must be available to you in connection with any offering. All information contained in this website is qualified by the terms of applicable offering documents or Prospectus. Neither the United States Securities and Exchange Commission nor any state regulator has approved or disapproved of the merits of any offering described herein. Any representation to the contrary is unlawful.