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Uncertainty abounds amid tariff turmoil

From 2 April, announcements on tariffs by US president Donald Trump created significant uncertainty and unpredictability across the global economy and financial markets. Tariffs are expected to hit their highest levels in 100 years and the announcement prompted the S&P 500 to fall by 12%, the Nasdaq to drop by 13% and the FTSE EPRA Nareit Developed Index of global listed real estate to decline by 10%. Markets subsequently rallied strongly when Trump announced a 90-day pause on reciprocal tariffs, though heightened uncertainty remains over what Trump’s endgame will be. Ultimately, the impact of tariffs on real estate markets will depend on how they affect occupier demand and capital markets.

The tariffs are set to push US inflation higher, and it is widely expected to reach 4% in the coming months. This could put the Fed in an awkward position, and in mid-April, it pushed back against market expectations for multiple rate cuts. Based on the latest information we don’t anticipate a recession, but rather a global economic slowdown. Compared to before 2 April, Oxford Economics cut its end-2026 GDP forecast for the US by 1.9% and for the rest of the world by 0.5%. The baseline forecast assumes that the US will implement 10% tariffs across countries apart from China, where around a 150% tariff is assumed, and Canada and Mexico, which suffer 25% tariffs on some goods. Should a stagflationary environment transpire, under these conditions real estate has tended to perform relatively well against other asset classes.

Prior to 2 April, we thought that global real estate values had bottomed in 3Q24, though now we think the recovery could be stunted and values may see some renewed downward pressure. Weaker expected economic growth will impact occupier demand and rental growth, while changes in the path of interest rates will also have an impact, with any cuts potentially cushioning real estate markets. We expect global real estate returns to be lower in 2025, but to remain positive, with significant uncertainty over the outlook. Initial data from MSCI showed that, after allowing for seasonal effects, global transaction volumes were broadly flat in 1Q25, following a steady recovery in 2024.

However, the new uncertainty will likely cause investors to pause and hold back. We think trade-focused logistics facilities at ports, airports and land borders are most at risk, along with more economically sensitive sectors such as office, hospitality and high-end retail. On the other hand, we think rented residential should be more resilient, supported by structural housing shortages across many countries, and other more defensive sectors such as healthcare and necessity-anchored retail.

Bridge over troubled water

Recent tariff announcements by the Trump administration caused a negative reaction around the world. Further retaliation from other countries also heightened investor anxiety. This has led to downward revisions to GDP growth and upward revisions to inflation.

Interestingly, this combination is actually neutral if not positive for private infrastructure on a relative basis against other asset classes, as infrastructure tends to be more sensitive to inflation than to GDP. Using listed infrastructure historical revenues and EBITDA as proxies for broader infrastructure fundamentals, we found that infrastructure shows a significantly stronger relationship with inflation than with GDP growth based on correlations.

This is consistent with our previous analysis of private infrastructure performance, which we showed benefits more from high inflation than from high GDP growth. Private infrastructure actually outperformed public markets the most during a combination of low GDP growth and high inflation.

We are not naïve enough to claim that infrastructure will not be affected by slowing economic growth and do expect some negative impact (some sectors like transport are more sensitive than others). However, historical performance data does suggest that private infrastructure benefits from ‘safe haven’ status, especially with the rise of stagflation risks.

Interest rates remain an unknown, as bond yields have increased recently due to market uncertainty. President Trump has explicitly said that lowering interest rates is a key goal, even threatening to terminate Fed Chair Jerome Powell to achieve this. Lower rates are unequivocally positive for infrastructure, as high interest rates were the top concern for infrastructure investors in the last four years.

Uncertainty to further slow distributions

Private equity funds and investors have been shaken by the pace of US tariff news over the past few weeks. While there are few immediate valuation effects compared to public markets, investor sentiment has taken a hit and expectations for M&A activity and distributions in 2025 have fallen, even with the announced pause in the tariff plan. Market participants generally agree that we are in an altered environment with increased uncertainty – opinion differs only as to the magnitude of change. What has not changed are the types of deals most likely to succeed in today’s market, characterized by fundamental business improvement, disciplined purchase pricing, and a clear buyer (exit) universe.

The downstream effects of the increased uncertainty are playing out in a way we have seen before in past market cycles: transaction activity falls, distributions slow, and the fundraising environment becomes tighter as limited partners have less capital to re-invest in funds coming to market. Depending on where public markets end up in 2Q24, the ‘denominator effect’ of rebalancing between asset classes could become a bigger part of the fundraising discussion, as it was following poor public equity performance in 2022. The secondaries market is very active as continuation fund vehicles remain popular, increasingly as a necessity to distribute proceeds. Although asset quality is becoming more mixed, selective participation promises lower-fee access to attractive deals for those investors with robust underwriting capabilities and strong manager relationships.

Direct lending outlook amid market turbulence

Amid the recent tariff announcements from the Trump administration, financial markets have become increasingly concerned regarding a potential recession. In addition to the direct impacts that tariffs could have on certain industries and businesses, soft indicators such as consumer and business sentiment have deteriorated as a result of the increase in economic and policy uncertainty.

While both sentiment and soft data have become weaker, the hard data and key credit metrics have not changed significantly since the tariffs were announced. Over the past month, there hasn’t been a material change in delinquency rates for corporate credit, residential credit, or small businesses financings. Entering this period, corporate balance sheets were generally in good shape as leverage levels were manageable and EBITDA trends were stable and in line with expectations. In addition, default activity was also fairly contained. If tariff pressure persists, the corporate direct lending strategy as a whole should be well positioned to navigate through this period given the position of strength that most companies were entering the second quarter. That said, the tariffs will likely result in an increase in dispersion as operating performance for various companies will be impacted by varying degrees. For example, two companies that operate in the same industry could experience materially different impacts from the tariffs depending on factors such as the location of a business’s customer base and the country where the company’s goods are produced.

Overall, the corporate direct lending strategy should be positioned to navigate through the tariff risk with potentially higher levels of dispersion at the borrower and manager level going forward. In the event that a full recession materializes, the direct lending strategy would likely experience an increase in default activity. The direct lending strategy should ultimately be resilient in such an environment and should produce a positive result although expected returns would be lower due to credit losses. In addition, a recessionary environment would likely put downward pressure on interest rates and result in lower yields on the direct lending assets as a result of a decline in base rates.