How the Smartest Investors Are Using Real Estate to Hedge Against an Uncertain 2025

October 13, 2025•7 min read

The Macro Picture: Late-Cycle Uncertainty

The U.S. economy enters 2025 at a crossroads. Inflation has cooled from its 2022 peak but remains above the Fed’s 2 percent target. GDP growth is slowing toward roughly 1.5 to 1.8 percent, and while a soft landing is the base case, conviction is low. Labor markets are still tight, consumer spending is easing, and the Fed has begun to cautiously reverse prior hikes. Capital costs are improving, but the path forward is not yet clear.

In commercial real estate, the storm appears to be passing. Cap rates climbed through 2023 and much of 2024, then stabilized. Multiple forecasters expect modest compression in 2025, which could translate into meaningful appreciation for buyers of quality assets. Apartment fundamentals remain sound. The record 2024 delivery wave is tapering, new starts are down sharply, and rent growth has turned positive again. Freddie Mac projects about 2.2 percent rent growth in 2025 with vacancy near long term norms. CBRE sees rent growth around the mid 2s and vacancy drifting below 5 percent. In short, supply is peaking, demand is steady, and the market is normalizing.

Rate cuts are already shifting sentiment. Mortgage rates have pulled back from recent highs, refinancing has picked up, and private capital that sat out 2023 is preparing to re enter. As financing costs fall, buyers tend to return, pricing firms up, and the best discounts fade. The most attractive entry points are often found just before the crowd comes back.

How High Net Worth Investors Are Repositioning

After a decade of equity dominance, high net worth investors are recalibrating toward stability, income, and control. Recent surveys show that a large majority of investors with 10 million dollars or more now allocate to alternatives, and private real estate is the most common alternative for investors in the one to five million dollar tier. Family offices hold roughly 40 percent of portfolios in alternatives and have nudged real estate allocations higher since 2023.

The logic is straightforward. Private real estate offers bond like cash flow, inflation linked rent growth, and depreciation that shields income. Over two decades, private real estate produced an average income return above bonds and well above equities, and much of that yield was tax deferred. Wealth managers also report a preference for tangible assets where sponsors can control expenses, leverage, and exit timing. Many family offices are sitting on double digit cash positions and would rather buy discounted, cash flowing apartments than chase speculative trades in crypto or late stage venture. The mindset is own what endures, not what trends.

Why Multifamily Still Commands Conviction

Multifamily’s resilience is proven. During the Global Financial Crisis, apartment rents recovered to pre crash levels within a few years, while office rents lagged for much longer. Occupancy in apartments dipped only modestly at the trough compared with steeper declines in other property types. When uncertainty rises, people still prioritize housing. That steady demand base makes apartments the most recession resistant major sector.

Inflation protection adds another layer. Leases typically reset each year, so rents can adjust when prices rise. From 2020 to 2023, national rent growth outpaced CPI. Higher construction costs also increase replacement cost, which supports values for existing assets. In practical terms, inflation turns a well bought apartment asset into a tailwind for owners.

The structural undersupply is striking. The U.S. is short millions of housing units, with the deficit concentrated in workforce and affordable segments. For years, most new development targeted luxury Class A. With new starts falling and financing tighter, completions are set to decline meaningfully through 2026. Household formation remains healthy, homeownership affordability sits near multi decade lows, and in many metros the monthly cost to own exceeds comparable rent by more than one thousand dollars. Until that gap narrows, renting will remain the default for a large share of households.

Demographics reinforce the case. Millennials are still forming households and often rent longer. Gen Z is entering the market with a high renting propensity. Many boomers are downsizing into rentals or multifamily senior communities. The stigma of renting has faded, and lifestyle flexibility carries more value. These forces create durable demand across cycles.

Playing Defense First: How Smart Operators Win

In this market, alpha comes from discipline. Top sponsors underwrite for stress, not sunshine. They assume flat rents in year one where appropriate, build exit cap rates at least 50 basis points above entry, and hold robust reserves. Deals must pencil if rates do not fall or if vacancies rise. The mantra is hope for the best, underwrite for the worst.

Resilient strategies share three traits. First, low basis. Buying below replacement cost builds intrinsic downside protection. Second, light to moderate value add. Focused renovations and tighter operations in Class B and quality Class C communities can drive organic NOI without stretching capex. Third, exit optionality. Flexible debt and business plans allow for refinancing, recapitalization, or extended holds if markets soften, and for early sales if pricing improves. That flexibility is what separates professionals from speculators. A well capitalized operator can choose the best path rather than be forced to sell into a weak bid.

Where The Smart Money Is Looking

Coastal and headline Sun Belt metros get attention, but sophisticated buyers are also targeting secondary markets with stable economies and better yield spreads, such as Oklahoma City and Tulsa. These markets combine affordability, population and job growth, and lower construction as a share of existing stock. In Oklahoma City, units under construction have been a smaller share of inventory than the national average, and deliveries are set to fall from 2024 peaks. Average rents near one thousand dollars per month create room for growth without pricing out tenants.

Recent performance reflects this resilience. By late 2024, Oklahoma City and Tulsa posted positive year over year rent growth while many expensive coastal markets were flat. Occupancies are in the mid 90s, and local economies tied to energy, aerospace, logistics, and healthcare continue to expand. Most important for investors, cap rates are often 150 to 200 basis points higher than in pricier metros. That means stronger current yield and a larger cushion against valuation swings. For income focused portfolios, these markets sit in a sweet spot. They are not overbuilt, not overpriced, and not over owned by institutions.

Tax Efficiency & Portfolio Hedging

For high earners, after tax results often matter more than headline returns. Depreciation and cost segregation can offset much or all of operating cash flow in early years. In 2025, bonus depreciation remains available at a reduced rate, which still allows a substantial portion of qualified costs to be expensed in year one. The effect is powerful. A six percent cash yield can show little to no current taxable income, while unused passive losses carry forward to offset future gains.

Compared with bonds or dividends, which are taxed annually at ordinary rates, real estate income compounds far more efficiently. A top bracket investor might need roughly an eight percent bond yield to match the after tax cash flow of a six percent multifamily yield. Add the ability to defer capital gains with 1031 exchanges and the step up in basis at inheritance, and it is clear why family offices view apartments as both an investment and a multi generational planning tool.

Real estate also hedges inflation and public market volatility. Rents tend to rise with the cost of living, while fixed rate debt is repaid with cheaper dollars over time. Private real estate has low correlation with public equities, which smooths portfolio drawdowns. When stocks whipsaw, apartments still collect rent.

The Bottom Line

In uncertain times, elite investors do not chase predictions. They buy optionality. Private multifamily offers hard assets that produce real income today, flexible paths to exit tomorrow, and built in protection against inflation, taxes, and volatility. The macro backdrop may stay choppy in 2025, but history is clear. Periods of uncertainty often create the best entry points for disciplined capital. For investors who value resilience over speculation, multifamily remains the cornerstone of a smart, long term hedge.

Sources

Morgan Keim

Managing Partner & Investor

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