The private real estate sector is grappling with significant challenges, stemming from critical mistakes made several years ago. Industry leaders gathered at the 2025 Yale Real Estate Conference to discuss how overconfidence and lax underwriting practices before the 2022 interest rate hikes have led to current fundraising difficulties and a slowdown in transactions.
Key Takeaways
- Overconfidence before 2022 rate hikes led to poor underwriting.
- Assumptions of low interest rates and double-digit rent growth proved false.
- Lack of distributions from older funds is hindering new fundraising.
- Niche sectors like data centers and industrial outdoor storage are showing resilience.
- Larger managers and specialists are better positioned for recovery.
Past Mistakes Impact Current Market
Panelists at the recent Yale Real Estate Conference highlighted that many of the private real estate industry's current issues are a direct result of past missteps. A significant factor was the widespread overconfidence prevalent before the US Federal Reserve began its aggressive interest rate increases in 2022. This period saw many managers making investment decisions without sufficient due diligence.
One panelist openly admitted,
"We as an industry got a lot wrong."This sentiment echoed through the discussion, emphasizing that many firms simply followed popular trends rather than conducting thorough independent analysis.
Historical Context
Before 2022, a prolonged period of low interest rates encouraged many real estate investors to take on significant debt. This environment made certain investment strategies appear safer than they truly were, particularly when coupled with optimistic growth projections. The sudden shift in monetary policy caught many off guard.
Flawed Underwriting Practices
The panel specifically pointed to problematic underwriting practices. For instance, in the multifamily sector, which saw its peak in 2022 and has since led foreclosure activity in the first half of 2025, according to MSCI data, underwriting was particularly flawed. Managers became comfortable with aggressive valuations due to low borrowing costs.
A key issue was the comfort in acquiring assets at low cap rates, such as 3 percent, by taking on debt at 2 percent. This strategy relied heavily on unrealistic projections.
"You get comfortable buying at a 3 percent cap rate by assuming consecutive years of double-digit rent growth in your forecast. That was never going to happen with the US rental population," a panelist explained.
This lax approach, coupled with the assumption that interest rates would remain low indefinitely, worsened the market downturn. It created a significant gap between the expected and actual values of assets, leading to widespread financial strain.
Impact of Rate Hikes
- The US Federal Reserve's sharp rate hikes began in 2022.
- Multifamily assets peaked in 2022, then saw increased foreclosure activity in early 2025.
- Low cap rates (e.g., 3%) were underwritten with 2% debt, relying on unsustainable rent growth forecasts.
Decline in Distributions and Fundraising Challenges
The transaction slowdown resulting from these issues has led to a dramatic decrease in distributions to investors. This lack of returned capital has, in turn, severely constrained the fundraising environment for new ventures. Data from PERE revealed that funds from the 2020 and 2021 vintage years had only paid out $2.2 billion of the $68 billion they had raised by the end of 2024.
Investors are now demanding to see returns before committing new capital.
"Every single investor we talked to, the drumbeat is extremely loud on DPI [Distributions to Paid-In Capital]," another panelist stated. "Get money back to your investors so you can live to fight another day."
This challenging environment means that advisory firms are finding it exceptionally difficult to attract new clients. One panelist shared that his firm has only managed to add two commingled fund clients in the past two years, out of approximately 300 candidates. These successful clients distinguished themselves with strong track records and a focus on specialized property types.
Signs of Recovery and Niche Sector Importance
Despite the current difficulties, there are early indications that liquidity is slowly returning to the market, suggesting a potential recovery. However, this recovery is expected to primarily benefit larger managers and those specializing in high-performing niche sectors. Panelists agreed that future success hinges on exposure to these specialized areas.
Sectors such as data centers and industrial outdoor storage (IOS) are gaining favor with investors' Chief Investment Officers (CIOs) because they have consistently outperformed the broader market. One panelist even quipped,
"If you want to go out and make money, start an IOS business."This highlights the shift towards more resilient and high-demand property types.
Managers who can identify and invest in these specialized, outperforming sectors will likely find it easier to secure funding and navigate the evolving real estate landscape. The emphasis is now firmly on strategic, well-researched investments rather than broad, trend-following approaches.
