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The ‘liberation day’ announcements on tariffs by US president Donald Trump created significant uncertainty and unpredictability across the global economy and financial markets. The proposals would take tariffs to their highest levels in 100 years and prompted the S&P 500 to fall 12%, the tech heavy Nasdaq to drop 13% and the FTSE EPRA Nareit Developed Index of global listed real estate to fall 10%. Markets subsequently rallied strongly when Trump announced a 90-day pause on reciprocal tariffs. In mid-May the US and China announced a truce and scaled back their bilateral tariffs significantly. Ultimately, the tariffs’ impact will depend upon how they affect occupier demand and capital markets and heightened uncertainty remains.

The Fed paused US rate cuts in January to keep them in the target range of 4.25‒4.5%. The tariffs are set to push US inflation higher, up from 2.4% in March, though theÌýUS-China truce may prevent it from hitting 4% in the coming months. Higher inflation could put the Fed in an awkward position as it attempts to battle both slowing growth and high inflation. Indeed, in mid-April it pushed back against market expectations for multiple rate cuts. Disinflation is still not fully taking hold in some countries and inflation remains above target. Eurozone headline inflation edged lower to 2.2% in March and, on the flash estimate, remained at that rate in April. UK inflation also edged down, to 2.6% in March from 2.8% in February.

Policy rate cuts across other markets continued in 1Q25. The Bank of England cut rates by 25bps in February, held rates steady in March, and then reduced them by another 25 bps at its next meeting in May. After its 25bps cut in January, the ECB cut rates a further 25bps in both March and April, taking its deposit rate to 2.25%. The Bank of Japan raised rates to 0.5% in January, but kept them steady in March and April, remaining cautious due to uncertainty around US tariffs. However, we expect more rate cuts across Europe, in line with market expectations and as economic growth comes under pressure.

In 1Q25, eurozone GDP growth accelerated to 0.4% QoQ, with expectations over tariffs having little impact. In the US, on the other hand, GDP fell 0.3% on an annualized basis, reflecting a surge in imports as businesses stockpiled goods ahead of tariffs being implemented. South Korea, an economy highly dependent on trade, also experienced negative growth in 1Q25, with GDP falling 0.1% YoY and 0.2% QoQ, dragged down by exports and investment. China surpassed expectations for a second quarter, growing 5.3% YoY in 1Q25 and 1.4% QoQ. However, growth forecasts have been downgraded across countries to reflect the impact of the trade war. On the basis of the latest information, we don’t expect a recession, but rather an economic slowdown.

Data from MSCI showed that, after allowing for seasonal effects, global transaction volumes slipped in 1Q25, following a steady recovery in 2024. This likely reflects uncertainty ahead of the implementation of tariffs and we expect some pause in market activity as investors assess their impact on real estate. According to MSCI data, global investment volumes were down 2% YoY in USD terms. Compared to 4Q24 investment volumes fell in the office, residential, industrial and hotel sectors, while retail was the only sector to see flat investment activity. Investment volumes were cushioned by the Americas, where retail and hotels respectively rose over the quarter, while APAC and EMEA were weaker and volumes slipped back across nearly all sectors.

Prior to ‘liberation day,’ we thought that global real estate values had bottomed in 3Q24 and upon entering the period of tariff uncertainty, confidence in the market had been building. According to data from CBRE, PMA and NCREIF on yields and cap rates across 290 city-sectors globally, yields fell in more markets than they rose in 1Q25, down in 25% of markets. They rose in 6% and were flat in the remainder. NCREIF reported US capital values flat QoQ at the all property level, while in the UK MSCI data showed them rising 0.4% QoQ (see Figure 1). On a total returns basis, at the all property level, performance was positive in both markets for a third successive quarter. We think that the tariffs could see the recovery stall, or even generate some renewed downward pressure on capital values. Overall, we have lowered our expectations for global real estate returns in 2025, but they remain positive, with significant uncertainty over the outlook.

Figure 1: All property capital value growth (local currency, % QoQ)

The announcements on tariffs from the Trump administration have created global trade tensions and heightened policy uncertainty. One of the consequences of the US policy shifts on the macro environment is an upward revision in US inflation forecasts. In general, tariffs result in a one-off rise in prices, though if inflation expectations increase as a result, inflation can stay elevated for longer.

In April, Trump enacted a 90-day pause on the harshest, reciprocal tariffs and in mid-May the US and China announced a 90-day truce, which will see the US’s new tariffs on China slashed from 145% to 30% and those from China on the US drop from 125% to 10%. The remaining tariffs are expected to feed through to higher good prices in the US over the coming months. If the truce is enduring though, it may prevent US inflation from rising above 4% this year, which it was widely expected to do prior to the truce.

Inflation forecasts have been revised higher across regions, and in April Oxford Economics’s forecast for the US for 2025 was over 1 percentage point higher than its January forecast (see Figure 2). We expect the US forecasts to be revised lower following the US-China truce. Higher inflation will likely restrain the Fed’s ability to cut rates in the face of a slowing economy and could see other central banks remain cautious too if they also see inflation rise. We expect US rates to be stickier than in other regions and that there will be a bifurcation in policy. The Fed is expected to continue to hold off from rate cuts in the near term, despite some pressure from Trump, whereas further rate cuts are expected in Europe.

Figure 2: Change in GDP growth and inflation forecasts between Jan-25 and Apr-25 (percentage points)

Economic growth, a key driver of real estate occupier demand, is also expected to be impacted by the tariffs, with real income shocks and rising effective tariffs. Compared to January, Oxford Economics’s April forecast lowered US GDP growth for 2025 by 1.4 percentage points, to 1.2% and China by 0.4 percentage points, to 4.1%. The short-term impacts of tariffs can already be seen, with the US economy contracting 0.3% on an annualized basis in 1Q25 due to greater imports. 2025 growth forecasts have been reduced globally, with weaker demand expected.

For the advanced economies, Oxford Economics cut its 2025 GDP forecast by 0.8 percentage points to 1.1%, driven by the US downgrade. The UK and eurozone suffered smaller downgrades, of 0.1 percentage points and 0.3 percentage points respectively, with 2025 growth now expected to be 1.1% for both (see Figure 2). The IMF also reduced its global growth forecast, to 2.8% and 3% for 2025 and 2026, respectively, a cumulative downgrade of around 0.8 percentage points relative to its January 2025 forecast. Despite this, global growth forecasts remain above recession levels.

The tariffs will impact real estate markets via their effects on economic growth and occupier demand, and also via their impact on the path of interest rates and risk premia for the asset class. They will also have indirect effects on real estate markets, for example, via higher construction costs and higher material prices, which could lead to delays in development projects or stymie them altogether, which could cushion rents. Moreover, the tariffs are likely to impact different parts of the real estate market in different ways, with some sectors more resilient and defensive than others.

The recovery in real estate pricing, which was starting to take hold, could see some stalling as the effects of the tariffs feed through. We started to see the bottoming of capital values in 3Q24, though capital value growth forecasts have been revised slightly lower, with significant uncertainty remaining. The outlook for capital values for 2025 is now weaker across regions and sectors, though we think the residential sector should show greater resilience. At the global all property level, we think that capital values will now be pretty flat in 2025, leaving investors reliant on rental income for returns. We think the office and industrial sectors may show some small capital value declines this year, with retail values pretty flat and residential values showing a modest uplift.

Global commercial real estate sentiment has also been affected by the uncertainty caused by the sharp shift in US policy and the impact of higher for longer interest rates. US volatility has caused some investors to seek a flight to safety and turn their attention more closely to European markets. Furthermore, the tariffs and economic outlook have created a downturn in consumer confidence, which may result in reduced consumer spending and could compound a tariff-induced slowdown in global trade. We think that lower trade volumes would impact logistics around transport nodes, including ports, airports and land borders and will likely weigh on rental growth and capital appreciation. US coastal logistics, which will face the brunt of the reduced international trade, looks more exposed, and will likely see the greatest pressure on occupancy, rents and property values.

Some logistics companies and related businesses are pausing expansion for industrial property and delaying decisions on new leases. However, in the short term, businesses have been stockpiling to avoid future tariff costs, which is driving temporary demand for warehouse space and pushing some rents higher. Trade barriers may encourage companies to shift manufacturing closer to home, driving longer-term demand for domestic industrial real estate. However, it may also cause trade diversion and the rerouting of trade via countries with lower US tariffs, particularly for Asia Pacific countries within reach of China, such as Malaysia and Vietnam.

The attraction of the US as a destination for reshoring is supported by favorable tax policies for domestic producers from the Trump administration. Therefore, we may see a rise in demand for US manufacturing space as the domestic manufacturing sector is impacted by patterns of reshoring. In Europe, we expect to see onshoring and nearshoring, which could provide positive fundamentals for domestic logistics. Indeed, as companies diversify their supply chains, it may present new growth opportunities across Europe. The European market will also likely be impacted as the continent ramps up its defense spending, which is expected to boost demand for logistics properties and manufacturing facilities, though building up the European defense industry will take time.

The office sector faces downside risks too due to weaker business sentiment and as companies exercise caution when considering expansion or relocation plans, often putting them on hold. How defensive offices are depends on the type of tenants. Class A offices with tenants that are less vulnerable to economic changes will likely prove more resilient as return-to-office mandates broaden. We expect the pause by businesses to continue until they have better visibility on where policy is headed, as uncertainty leads to weaker business investment and hiring decisions. Overall, we now think that office capital values will show a small fall in 2025.

We already saw it as the weakest sector, strongly bifurcated between the best, prime offices, which have been in demand, aided by back-to-office mandates, and the rest, which account for a large portion of office space.

In contrast, we think that the residential sector is less exposed to the downside risks from the tariffs and is well positioned to be resilient due to strong fundamentals. Construction is likely to slow while demand holds strong and we’re increasingly optimistic on the sector. Indeed, global residential investment activity showed a steady recovery in 2024 (see Figure 3).

Figure 3: Global residential investment volumes (seasonally adjusted, USD billion)

Elevated mortgage rates in the US are sustaining demand for rental apartments, supporting modest rental growth. We still expect global residential capital values to grow by around 2% this year.

Student accommodation outside of the US may also benefit from a redirection of international student flows away from US institutions towards other markets, such as Australia and Europe. At the same time, some countries are tightening student visa requirements, which could be a drag on student numbers. Other, more defensive asset classes include healthcare and life sciences, which are underpinned by demographics drivers, sectors and needs that are independent of the broader state of the economy.

Overall, uncertainty and unpredictability in policy make the impact of the tariffs on real estate markets hard to pinpoint. The uncertainty is weighing on business confidence and despite recent progress in trade deal negotiations, including the temporary reduction in US-China tariff rates, the current deals are neither formal nor permanent. The administration’s ability to make sharp policy shifts has caused investors to act with caution.

After a choppy 2025 so far, we think that 2026 has the potential to be more positive for real estate markets and for capital value growth to rebound. Furthermore, other policies from the Trump administration, including deregulation within real estate development and tax cuts, may provide a boost to the economy and provide a tailwind for real estate occupier demand. Investors will likely hold back on investments amid uncertainty, though necessity-based asset classes are expected to outperform.

Moreover, real estate should provide protection against higher inflation. Against this backdrop, we think that investors should seek out the most resilient and defensive sectors, where they may find attractive opportunities and entry points. On the other hand, we think they should be more cautious about sectors and investments that are most exposed to the brunt of the tariffs. Above all, careful underwriting and evaluation of all potential deals is critical in this environment.

Unlisted real estate sector performance outlook