Guest view: We’ve gone back into the ‘70s, but not in the way you might think

For global real estate investors, a growing sense of cautious optimism prevailed at the outset of the year. There was a palpable feeling that finally, we were going to see some market stability after enduring a long period that held anything but.

As it turned out, that optimism didn’t last long. The first half of 2025 has seen geopolitical upheaval on a level we haven’t seen for decades. And it doesn’t look like abating any time soon. To borrow an iconic line from the classic poster for 70’s movie Jaws 2 - ‘just when you thought it was safe to go back in the water’…

However, rather than predicting shark-infested waters ahead, our investment outlook for the rest of the year is considerably more positive. Not only do we believe there is plenty of opportunity for those who know where to look. We also predict that classic film lines aren’t the only thing from the 70’s making a return to relevance.

Most modern real estate research is predicated on data from the past 40 years, with cycles analysed in reference to a period of sustained cap rate compression from the 1980s onward. This recency bias is compounded by the fact that there are very few people operating today who were active in the market before that.

However, this approach – be it led by data or personal experience – risks miscalculating the impact of sustained periods of high inflation and upward-trending cap rates, which fall outside of conventional post-1980 modelling.

To find relevant data, our research team went back further. Much further. They uncovered historical real estate performance metrics from the 1960s and 1970s which we believe offer a far more accurate benchmark against which to measure the current market environment, and which disrupt traditional assessments of real estate performance in periods of prolonged high inflation.

Looking back to look forward

The 1970s didn’t just deliver the most quotable movies. It also provides an uncanny historical comparison to current market conditions. Both eras saw inflation spike in the first 26 months of the cycle before easing over the following 26 months. In the 1970s, inflation then peaked again over the following 40 months before tapering into the ‘80s and beyond.

The stickiness of present inflation mirrors that of the 1970s. Evidence indicates that a similar second inflation spike may be coming in the near future, shifting the outlook for income growth across global real estate.

Inflation, cap rates and rental growth

The period from the 1980s onward has been characterised by a consistent 40-year decline in interest rates and progressive cap rate compression, which has applied upward pressure to valuations but negative pressure to rental growth.

Looking at the shape of cap rate movement during the 1960s and 1970s shows a starkly different trend. From 1966-1981, cap rates rose from 8.4% to 13.4% across the US market, compared to a decline in US cap rates to a record-low 4.6% between 1982-2023.

Annual rent growth averaged 7.9% in the period of rising cap rates vs 3.7% in the period of declining rates, owing to the inversely proportional relationship between the two metrics. However, average rental growth wasn’t just stronger during the period of rising cap rates; it in fact exhibited exponential growth.

Hines research shows that this exponential rate of rental growth during periods of elevated cap rates is statistically significant, as is the relationship between compressing cap rates and linear rental growth decline.

In other words, forecasting for a second inflation spike in the coming years and a corresponding period of cap rate expansion should provide investors with increased confidence in the outlook for income growth, provided they can navigate the development and operational challenges inherent in the current cycle.

How to capitalise

Elevated cap rates, particularly against the already fractious market backdrop of the 2020s, bring fresh challenges for real estate investors and developers. Owing to a lag between cap rate expansion and income growth, underwriting assumptions in periods of rising cap rates become less dependable. This, coupled with already strained viability assumptions across developed markets, could hinder new construction activity.

This creates an exciting opportunity for research-led, vertically integrated investors and developers, who are well-positioned to forecast for future income growth and who have both the development and operational expertise to deliver high-quality schemes into supply-constrained markets whilst also driving future income growth through active asset management.

Stock selection and regionally diversified strategies are key. The European living sectors – particularly purpose-built student accommodation – are characterised by low provision rates and significant upward pressure on rents, albeit with a heavy focus on operational performance. Meanwhile, grocery-anchored retail in the US is poised for strong performance, and a lack of retail supply in Asia amid dynamic growth has further bolstered the case for investment into the asset class.

As recent years have shown, the global economy is highly sensitive. Making firm predictions is a challenge, and several policy levers could be pulled in the coming months to alter the direction of travel for worldwide economies.

Nonetheless, several key indicators suggest that our current cycle represents a paradigm shift compared with the past 40 years. If we are to enter an extended period of rising cap rates, historical analysis suggests that real estate has plenty of potential to continue to perform. How real estate derives returns may differ from recent memory, but the oldest asset class in the world has historically thrived in differing rate environments.

To read the latest IPE Real Assets magazine click here.