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US real estate market holds up as trade deals get negotiated

The trade situation in the US has developed, with more trade deals being negotiated. The agreement between the US and the EU imposes a 15% tariff on most European imports to the US, which is lower than the 20% originally proposed on ‘liberation day’ in April. Moreover, the US economy has held up well so far, showing strong growth in 2Q25, more than reversing the decline in 1Q25, which had been driven by a jump in imports ahead of tariffs. The US has also seen a relatively muted rise in inflation so far, reaching 2.7% in June as tariffs started to feed through to goods prices. Stock markets have bounced back, shrugging off tariffs, and US equities have reached new highs. However, there was renewed market volatility around Trump’s 1 August deadline to conclude trade deals.

The US real estate market backdrop has also improved, buoyed by fading recession risks and financial markets’ recovery following the initial shock of the tariff announcements and accompanying declines and turbulence. The latest data from NCREIF show that US all property capital values were flat QoQ in 2Q25, following a 0.1% QoQ rise in 1Q25. Moreover, total returns were 1.2% QoQ, little changed from 1.3% QoQ for 1Q25 and giving a 1H25 total return of 2.5%. Retail and residential property performed best, followed by industrial, while US office values fell another 0.7% QoQ.

According to data from MSCI, and after allowing for seasonal effects, global real estate investment volumes slipped again QoQ in 2Q25, following a decline in 1Q25. This indicates that investors continued to hold back due to uncertainties over tariffs and the economic backdrop. Global investment volumes were down 11% YoY in USD terms. Global investment volumes slipped QoQ in the retail, residential and industrial sectors, while office and hotel sectors both experienced an increase in investment activity. We expect investment activity to show some recovery in 2H25 if progress continues on trade and the economy holds up, which should calm investors’ nerves.

Positive fundraising headlines mask yesterday’s good news

The close of H1 brought some good news for the infrastructure asset class, with a flurry of mega fund final closes suggesting that inflows into the asset class are picking up. A total of USD 117bn was raised by 57 funds¹, with a leaning towards core plus strategies (50%) in contrast to last year’s market, where core funds dominated the strategy mix (47%) in final closings. This shift towards higher return targeting funds may reflect the elevated returns available in public and private credit, as heightened interest rates linger.

Looking a little deeper at fundraising data, interim fund closes paint a somewhat different picture of the market in recent years. Judging by final closes, 2023 and 2024 appeared downbeat, with managers securing USD 99bn and USD 102bn, respectively. However, based on interim closes, they were much more active, securing USD 151bn and USD 110bn, respectively. This distinction is important because, first, it helps explain why the infrastructure deals market has been so resilient, as deployable capital has been buoyant and second, it reminds us to remain critical of the numbers commonly presented, with final close figures being the standard measure and primary driver of sentiment.

Solid rebounds despite shaky grounds

Moving to the deals market, it has solidified its rebound after elevated rates led to a decline in 2023 deal values and volumes, down 20% and 11%, respectively, compared to 2022.² Despite the economic uncertainty brought by Trump 2.0, H1 aggregate deal values this year are flat relative to the same period in 2024, when activity had rebounded to 95% of aggregate deal values of the 2022 peak. Digital infrastructure, specifically data centers, has driven much of the deal market’s resurgence, with valuations in the sector gaining ground, in contrast to some reversion to long-term averages seen elsewhere. However, the broader digital infrastructure sector is more mixed, with challenges mounting for some of the disruptor alt nets in the fiber broadband market, as service uptake has proved disappointing.

Despite the Big Beautiful Bill winding down tax credits for wind and solar in the leading US market, we anticipate a counterintuitive flurry of capital deployment activity in the renewable sector there over the next 18 months. Projects will need to have commenced construction before the end of 2026 and be completed by the end of 2027³ to maintain eligibility for tax credits. This may put pressure on supply chains for project build out and could risk leaving some developers stranded if contractors are spread too thin across competing projects. Due diligence on build out in this sector should focus on safe harboring to ensure the key benefit of tax credits is preserved in the near term.

Continued growth, exits remain a challenge

Private equity funds continue to see modest appreciation following in the footsteps of public markets, which have generally brushed off tariff threats, geopolitical chaos, and middling economic sentiment. M&A volume is down 9%⁴ from an already slow 2024, with hopes pinned on a second-half rebound that could be catalyzed by a possible September rate cut. In the meantime, top performing private equity deals continue to attract a strong buyer base, while many others languish, awaiting sale.

The continuation fund⁵ market – which has so far provided a means for selling long-held assets to other pools of capital managed by the same general partner – is coming under increased underwriting scrutiny from investors. Introduced as a situational solution for the best assets which could generate outsized returns with a few extra years of holding, continuation funds now account for about 20% of exits⁶, a record high. Meanwhile, the percentage of investors choosing to cash out, rather than re-invest, is approaching 90%, also a record.⁷ Bottom line: cash is king, and investors want liquidity in a market where distributions are increasingly scarce. This overwhelming preference for liquidity is something to watch, though for now, record levels of dry powder in secondaries-focused vehicles are providing an adequate buffer.

Company performance remains generally solid at midyear, though the impact of US tariff policy has yet to show through. Fundraising continues to be challenging for all but the best-performing managers, which are increasing in size rapidly with strong investor support.

Recent portfolio observations for corporate direct lending funds

Corporate direct lenders continue to offer access to high-quality private credit loans. For the corporate direct lending funds/ business development company (BDCs), we have observed relatively consistent performance across the cohort in 2Q25. In addition, interest income remains the primary performance driver, with distributions generally remaining above 9% on an annual basis. While asset yields have trended marginally lower YoY due to declines in base rates and spreads, the fundamental outlook for the asset class remains stable and has marginally improved over the same time period.

In terms of corporate direct lending fundamentals, credit conditions remain stable. In particular, the corporate direct lending funds/BDCs have exhibited low and stable non-accrual rates, indicating minimal near-term default risk. In addition, the corporate direct lending strategy has shown improving interest coverage ratios. While several funds previously dropped below the 2.0x threshold following the increase in rates, most managers raised their interest coverage ratio back to the 2.0x level in 2Q25. Payment-in-kind (PIK) levels have slightly increased in recent quarters, but the overall level remains manageable, supported by structural limits and strong loan performance.

While default risk is relatively low in the near term and debt service capacity has improved recently, company operating performance has also been positive. Borrowers continue to demonstrate healthy EBITDA growth and resilient margins in the high 20% to 30% range. Although there could be modest performance dispersion due to tariffs or sector-specific factors, earnings and operating performance for the aggregate borrower universe remain stable.

As it pertains to target returns, unlevered asset yields have declined over the past 12 months. The reduction in the unlevered yields in corporate direct lending is driven by two main factors: loan spread compression and a decline in base rates. For reference, SOFR has dropped by ca. 100 bps YoY, falling from 5.3% on 30 July 2024 to 4.3% on 30 July 2025. Faced with tighter spreads and lower base rates, most managers plan to increase leverage in order to maintain a relatively consistent net return target. While the overall leverage level varies by fund/BDC, most managers are expected to utilize leverage between 0.5x and 1.0x.

In our view, the corporate direct lending strategy should remain a stable source of returns for investors. The fundamental profile of the underlying portfolios remains stable with positive initial indications on credit performance for 2Q25.

Strategy shifts and resilient gains

In 2Q25, hedge funds saw broadly positive outcomes. Gains were predominately driven by equity hedged and trading strategies. Credit/income and relative value strategies (RV) generated smaller profits. In equity hedged, technology-focused managers drove positive performance, whereas losses stemmed from short positions in the biotechnology sector. Within trading, gains were led by discretionary macro managers, who typically benefited from a mix of curve steepeners and receivers across the US and EU. A short USD bias also added to returns, especially relative to the EUR. Gains from credit/income primarily stemmed from shorter duration carry strategies, while corporate long/short managers with net short positioning were challenged. Across relative value strategies, fixed income relative value managers experienced losses during the risk off moves in early April. However, many managers were able to capitalize on dislocations in cash/futures basis and bond RV, recovering losses and finishing the quarter with positive returns. Quantitative equity strategies continued to perform well during the quarter, with both fundamental and technical models generally contributing positively.

Looking ahead, across hedge fund strategies, the growing market focus towards government debt burdens and rising yields has led us to maintain a large allocation to discretionary macro to ‘hedge’ our exposure to equity hedged strategies. In these strategies, we continue to see a positive alpha backdrop in both the US and Europe. Technology, media and telecommunications (TMT), financials and biotech continue to represent the lion’s share of our risk contribution within the strategy.

We marginally reduced our credit/income allocations last quarter in response to compressed credit and liquidity risk premia across both corporate long/short and asset-backed strategies, refocusing on our best risk/reward opportunities. We’re less focused on adding exposure to higher beta segments of the tradable ABS market, given the current valuations for most assets. Within relative value, we plan to maintain our current allocations to fixed income relative value strategies. The proposed relaxation of supplementary leverage ratio (SLRs) could be a net positive for balance sheet intermediation but may cause further compression in already tight spreads. Across Trading strategies, we continue to favor discretionary approaches over systematic ones, and we maintain a healthy balance between EM and DM exposures. For EM macro managers, we believe the near term opportunity set has improved due to reduced policy uncertainty and a weaker USD. Finally, we maintain high conviction in commodities, with our thesis focused on the supply/demand dynamics in the energy complex.

¹, data accessed 27 July. ÃÛ¶¹ÊÓƵ analysis.
², data pulled 29July 2025.
³ For a thorough review of , link
^4Ìý, data accessed 29 July 2025.
⁵ÌýContinuation funds, also known as GP-led secondaries, allow managers to offer liquidity to existing investors in primary funds or assets, while extending the hold period of assets back by new capital.
⁶Ìý, data accessed 29 July 2025.
^7Ìý, data accessed 29 July 2025.