Navigating Some New Market Currents

Sentiment Slumps, But Smart Capital Keeps Moving

Investor confidence is slipping. The latest reading of the?University of Michigan Consumer Sentiment Index?fell from?71 to 67, the first material decline in months. It’s a small dip, but a meaningful one—especially when paired with continued uncertainty around interest rates, inflation, and a volatile equity market that remains concentrated in a few mega-cap stocks.

The consumer sentiment index sounds like a prosaic econ metric, maybe describing how people feel about buying stuffed animals or springing for free-range eggs. But it turns out the metric is a pretty good gauge of the economic mood, including how investors are feeling about things. The CSI has now fallen back to its lowest level since July.?

So, what’s driving this sentiment shift? And more importantly—how should investors be thinking about portfolio construction as uncertainty creeps back in?

Market Volatility & The Fed’s Balancing Act

Interest rate expectations are shifting again. While the Federal Reserve’s latest dot plot suggests a measured path toward rate cuts, the market remains skeptical. The 10-year Treasury yield hovers around 4.5%, meaning borrowing costs remain elevated, and valuation pressures persist across asset classes.

The S&P 500’s price-to-book ratio is 5.3x, nearing 2000-era dot-com levels, while tech mega-caps dominate index performance. Historically, moments of extreme market concentration have often preceded increased volatility (the S&P 500’s price-to-book ratio was also above 5 in March 2000, on the eve of the dot-com bubble bursting1). This elevated ratio remains a key concern for investors looking to de-risk their portfolios. Pick your metric: price-earnings ratios and Shiller P/E ratios tell a similar story — the current pricing of equities looks a lot like it did before the tech bubble burst, and like it did in early 2022 before falling interest rates cost the S&P roughly a quarter of its value.??

Should savvy investors be fearful? We don’t think so. With the stage set for public market volatility, the moment clearly calls for greater diversification. Should you push your chips aggressively into cryptocurrencies? If you haven’t already, you’re probably late to the party.

It may be a moment for assets that move a lot slower than the news cycle. Let’s take a look.??

Private Market Real Estate: An Allocation for the Moment

As public market sentiment falters,?private-market real estate remains a compelling diversifier. Private-market alternatives tend to correlate less with public equities, and real estate can provide regular cash flow to stabilize portfolios. This is a familiar story. What are the key dynamics and questions within CRE right now? What sectors should get most attention??

Consider this:

Multifamily rents?are stabilizing, and expected to grow, in key metros. In the second half of 2024, multifamily sales activity grew by 58% year-on-year.?It’s fair to wonder what kind of transaction volume we will see, with expectation for rate cuts having moderated. For multifamily, the current moment is more about fundamentals than capital markets. The smart money says that oversupply of multifamily is coming to a close, with new deliveries thinning considerably as the development started pre-2022 comes to market. From a recent Green Street sector report: “looking ahead, pros said the pool of buyers ready to reenter the market is continuing to grow.”2

Multifamily rents?are stabilizing, and expected to grow, in key metros. In the second half of 2024, multifamily sales activity grew by 58% year-on-year.?It’s fair to wonder what kind of transaction volume we will see, with expectation for rate cuts having moderated. For multifamily, the current moment is more about fundamentals than capital markets. The smart money says that oversupply of multifamily is coming to a close, with new deliveries thinning considerably as the development started pre-2022 comes to market. From a recent Green Street sector report: “looking ahead, pros said the pool of buyers ready to reenter the market is continuing to grow.”2

“Pretty much every market in the country is projected to have positive rent growth this year at some point, even in markets with high supply like Austin,” said Lee Everett, an executive vice president and head of research and strategy at Atlanta-based Cortland. “The key to this growth is that we’re moving past the supply peak—within the next six months, the peak will be over.”

Consider also the impact of protectionist policy on construction cost. 80% of softwood used in multifamily construction in the U.S. is imported from Canada. All told, the impact of new tariffs already proposed (and mostly walked back) would amount to a 7.5% increase in multifamily construction cost. Even the?potential?for such tariffs may shift the calculus for multifamily developers and prevent new starts on the margin. Pair that with muted expectations for interest rate cuts and a potential thinning of the construction labor force (if immigration policy grows increasingly restrictive) and supply constraints for multifamily appear to only be growing in 2025 and beyond.???

Industrial vacancy rates?sit at?6.7%, still below historical averages as logistics and e-commerce sustain demand.

Despite a similar supply glut, Industrial fundamentals also look good; Clarion Partners recently forecasted Industrial as the top performing CRE asset class from ‘24 to ‘28.?

Among all CRE sectors, Industrial feels perhaps the most sensitive to the emerging economic agenda of a new administration. It may not be clear for some time which countries will be subject to new tariffs, the magnitude of those tariffs, and the domestic industries affected. We can say confidently, though, that trade policy and supply chains will look different by this time next year.?

In particular,?

• E-commerce could suffer in certain areas that rely heavily on imported consumer goods or inputs for manufacturing.
• Flexible space in areas to support reinvigorated domestic supply chains, especially in the heartland, may benefit.??

The overarching point: be sure to understand how shifting industrial and trade policy may impact the thesis of a given industrial asset. Is there a plan B for a downside scenario if the primary tenant base is disadvantaged in a new trade regime? Is there upside to realize from onshoring or domesticizing of certain industries or subindustries??

Specifically, onshoring of supply chains and manufacturing puts an emphasis on mom-and-pop suppliers, which tend to be tenants at small bay industrial properties. The small bay investment opportunities abound in the middle market, where EquityMultiple believes risk-adjusted returns are healthy in part due to muted competition (institutional investors like Blackstone are unlikely to play in the sub-$100M total capitalization slice of the market).?

A Broader Take on Sectors

You can see the opportunity for Multifamily and Industrial reflected in all-up sector numbers. These asset classes fell from impressive performance up until 2022 to a rough 2023, and muted returns in 2024. In short: they were underbuilt; then, briefly, oversupplied; and now, going forward, likely undersupplied again as the burst of pre-interest-rate-hikes development comes to market.?

Return-to-office mandates are so prevalent now that the concept has earned an acronym (RTO)—over the past two quarters, the percentage of companies requiring three days per week in office increased to 28% from 19%. A broad array of major employers—such as Amazon, AT&T, Boeing, and Goldman Sachs—announced substantially increased in-office time over the past year. This could be a big deal, not just for office but also for hotels as business is de-Zoom-ified, for high-foot-traffic central business district retail, and for Class A and luxury apartments in submarkets offering attractive access to major employers.??

Private credit opportunities are expanding as regional banks reduce lending exposure, allowing nimble investors to capitalize on higher yields.

The bottom line? In times of uncertainty, cash flow and low-correlation alternatives matter.

Looking Ahead: Navigating 2025’s Market Crossroads?

The months ahead will test investor patience. With a new administration settling in, potential tax policy changes on the horizon, and inflation cooling but not fully tamed, sentiment may remain choppy.

Yet, history tells us that some of the best private-market investment windows emerge when public markets are volatile. Investors who prioritize stable, income-producing assets may find that real estate—often overlooked in the heat of stock market rallies—plays an increasingly important role in portfolio stability.

1?Source: BofA Global Research

2?Source: Green Street