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Despite macro uncertainty bleeding into 2025, investor confidence is returning, and alternative asset classes such as real estate and collateralised loan obligations are showing promising signs.

Investors enter 2025 with lingering uncertainties. However, the consensus is that we will remain in a higher interest rate environment compared to the last 15 years. While the shock and awe of rate hikes between 2022-2023 marred several asset classes, higher rates support alternatives like collateralised loan obligations (CLOs), while the real estate market appears to be moving on from a challenging period.

CLO growth continues

Alternative credit has continued to surge in popularity among investors and is quickly becoming an essential part of portfolio diversification. In previous years, real estate debt and direct lending have been the primary drivers of investor interest. However, CLOs have grown in popularity.

CLOs continue to provide attractive opportunities across the capital structure. Higher-for-longer base rates support healthy relative yields across the CLO debt spectrum.

Senior loan new issuance activity dropped in 2024 as M&A activity remained muted amid higher rates. CLOs relied on the secondary market for collateral, contributing to rising loan prices. However, as rates decline and fiscal and regulatory changes from the US election become apparent, risk appetites and M&A activity are expected to improve, leading to new loan issuance throughout 2025. This mix of new issuance alongside the continued opportunities in the secondary market should provide a balanced supply profile, benefitting CLOs through healthy asset spreads.

CLO market growth is set to continue as more investors enter the space, attracted by potential yield enhancement and portfolio diversification. CLOs have moved into the mainstream as an attractive complement to other alternative asset classes as well as traditional fixed income, with the CLO capital structure offering a spectrum of risk-return options for investors of all types.

Allocations to alternative sources of credit offer a multitude of benefits to long-term investors. In particular, CLOs offer multi-decade-tested potential for enhanced income, portfolio diversification, and varied liquidity options to satisfy unique risk and reward appetites. In the current environment, higher-for-longer base rates support healthy yields across the CLO debt spectrum and the long-term, non-marked-to-market nature of CLOs complements the current market dynamics in favour of CLO equity.

Recovering real estate

Even though rates may have peaked in many countries, cuts – notably by the US Federal Reserve – will likely be slower and smaller than many expect. Real US GDP growth averaged 2.3% over the last five years, much higher than the 1.8% annual average between 2010-2019.

Along with expected returns reflecting higher rates, several medium- to long-term factors are likely to support private market assets, allowing investors to explore long-term investment themes such as artificial intelligence, the energy transition and climate change. These are long-term tailwinds for real estate. In the nearer term, the asset class shows healthier signs following a challenging period.

Non-office-related private real estate has bottomed as the capital and financial headwinds facing landlords have faded. Rent and occupancy growth are healthy, and investor demand is returning for most sectors. The improving climate is driving increased competition for real estate deals, an indicator of an impending recovery for the asset class.

While the office sector remains challenged globally, there are pockets of opportunity. Select European and Asia Pacific markets are starting to sprout green shoots, with some markets experiencing rental growth and low vacancy rates. In retail, which is arguably further along in its recovery and adaptation to consumer preferences, we see opportunity in necessity retail, such as grocery and convenience stores. These examples demonstrate that real estate is not a monolith, making the case for diversification within real estate exposure as well as in multi-asset portfolios.

More to come?

Conditions are looking attractive for real estate to bounce back in earnest, while the CLO market continues to expand its borrower and lender bases. With investors seeking ways to diversify portfolios effectively, these asset classes show the important role alternatives play in an increasingly complex investment environment.

Read Nuveen’s expert commentaries on real estate and other private market asset classes in the 2025 Private Markets Outlook. Nuveen’s Alternative Credit Insights provides insights across the spectrum of private credit asset classes.
 

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This is a sponsored article from Nuveen.