Real Estate After the Reset

The Oldest Asset Class

For as long as people have been exchanging value, land and shelter have been foundational assets. Long before stock markets, bond markets, or even the modern banking system existed, people owned real estate. They farmed it, leased it, improved it, lived on it, and relied on it. Control of property mattered because land and housing are practical, necessary assets that endure across generations.

Real estate is the oldest asset class for a simple reason. It offers a combination of benefits that few investments can deliver at the same time. Ongoing cash flow through rent, long‑term growth through rising values, and inflation protection as rents reset and replacement costs rise. These benefits are practical, durable, and tend to persist across cycles regardless of short‑term market noise.

In modern portfolios, real estate continues to serve this same role. Income, growth, and inflation protection are the core components of a well‑constructed strategy. The fact that real estate also receives favorable tax treatment in the U.S. further strengthens the case. When priced appropriately and financed conservatively, real estate has historically offered investors a distinctive and resilient set of benefits.

Real Estate Reset

At Highland, we have long advocated for real estate as a core holding that helps diversify portfolios dominated by stocks and bonds. Over time, returns for core real estate have behaved much as one would expect, generally falling between bonds and equities while delivering a blend of income and growth.

Despite this attractive long‑term profile, the past several years have been challenging. Rapidly rising interest rates, combined with a temporary surge in new supply, particularly in housing, forced a broad reset in values, one not seen since the Global Financial Crisis. Unlike many other asset classes, where valuation adjustments were gradual or deferred, real estate prices moved quickly. That pressure was further amplified by redemptions from pension plans and other institutional investors who had meaningfully increased allocations to real estate in the years following the COVID‑19 pandemic.

For long‑term investors, this reset has restored a margin of safety that was largely absent for much of the prior decade. Today, real estate, and multifamily housing in particular, offers a compelling entry point. Apartments stand out because the need for housing does not disappear in weaker economic environments. People may delay moving, consolidate households, or trade down, but they do not opt out of shelter. Combined with a sharp decline in new construction and elevated replacement costs, these dynamics are reshaping the opportunity set for apartments.

Why Apartments Stand Out

Across the country, many quality apartment assets can now be acquired at significant discounts to replacement cost. That matters, because when existing buildings trade well below what it would cost to build today, development effectively shuts down. This dynamic is clearly visible in national construction data. In prior cycles, the combination of lower supply and stable demand has reliably set the stage for rent growth and improving investor sentiment. In fact, we are already seeing renewed flows of capital back into multifamily quality assets.

Apartments in the most dynamic cities sit at the center of a widening affordability gap between renting and homeownership. In many markets, monthly mortgage payments are now materially higher than renting comparable units. This creates a structural support for rental demand in regions like the Bay Area, Greater Puget Sound, Southern California, and rapidly growing markets like Denver/Boulder, Salt Lake City, and Boise.

Seattle: An Early Cycle Example

Within the national context, the Greater Seattle metro offers an instructive example.

Based on data from multiple sources, including Timberlane Partners, one of Seattle’s most active multifamily investment firms, Seattle moved through its peak delivery cycle earlier than many growth markets. New supply crested in 2024, and over the past several quarters vacancy has stabilized while effective rent growth has remained positive. At the same time, new construction starts have slowed materially, reducing the risk of extended oversupply.

This pattern is familiar in mature markets with structural supply constraints. Corrections can sometimes be sharp, but recoveries often begin sooner once deliveries fade. Seattle’s diversified employment base, anchored by technology, life sciences, healthcare, and advanced manufacturing, continues to support renter demand. Homeownership remains meaningfully less attainable than renting, reinforcing the long‑term relevance of apartments in the region. The homeownership cost is now 2.8x higher than renting in the Greater Puget Sound, compared to 1.7x nationally.

Perhaps most notable is the pricing environment. Assets that would rarely trade at meaningful discounts in prior cycles are now changing hands at 30%–45% below replacement cost and, in many cases, below prior sale prices. These dislocations tend not to persist once supply tightens and capital markets stabilize. A skilled apartment operator can both take advantage of the pricing environment and add value through hands‑on operations and improvements to the asset.

Implications for Investors

Taken together, these dynamics reinforce our long‑standing view that real estate continues to play an important role in diversified portfolios. The recent correction has been uncomfortable, but it has also improved forward‑looking return potential by restoring discipline to pricing and capital allocation. Within real estate, multifamily stands out as a sector where long‑term demand remains resilient, supply is moderating, and current entry points are meaningfully better than they have been in years.

As always, not every market or opportunity will make sense for every investor. But for clients focused on income, durability, and long‑term growth, apartments warrant renewed attention. We will continue to evaluate these trends and look forward to discussing with clients where selective exposure to real estate, and multifamily in particular, may be appropriate as part of a well‑balanced portfolio.

If you’d like to discuss how these dynamics may apply to your portfolio, please reach out to your Highland advisor or contact us here to start a conversation.

by Evan Wirkkala, Chief Investment Officer