InsuranceAUM · Oct 8, 2026 · 32m · 20m saved
With Brendan MacDonald, Partner and COO of StepStone Real Estate · Margaret McKnight, Partner and Head of Portfolio Solutions at StepStone Real Estate
More than $250 billion of real estate net asset value is held in closed-end funds that have passed their 10-year life, Brendan MacDonald said, and the legal duty to wind those funds up is one of two forces now pushing owners to sell or recapitalize.
Real estate's trailing returns are poor, and many investors read that as a reason to stay away. Margaret McKnight said the weak returns, and the trouble facing owners who borrowed before rates rose, are why StepStone expects a bull market for buyers of secondary stakes in real estate funds.
"So that the bad news and the disarray also make it a good opportunity." — Margaret McKnight
Brendan MacDonald, Partner and COO of StepStone Real Estate, and Margaret McKnight, its Partner and Head of Portfolio Solutions, on the InsuranceAUM podcast, work inside a firm that commits about $15 billion a year to private real estate funds. MacDonald was a founding partner of Clairvue Capital Partners, which merged into StepStone to form its real estate business. McKnight spent more than a decade at Carlyle's Metropolitan Real Estate.
The full episode is covered here so you can skip it. 32 minutes of audio, 12 minutes of reading.
Here are the 9 insights that matter.
Key Takeaways
Real estate prices have corrected to near the bottom of the cycle, while other asset classes rebounded or never fell
Only 17% of US loans that came due last year were fully resolved, McKnight said
Unexpected inflation, not ordinary CPI inflation, is the risk real estate hedges
From 1973 to 1981, core real estate delivered 13.6% against 5% for the S&P 500, she said
Fund valuations trail the market because appraisers need trades, and trading has slowed
Distributions to fund investors have run at about half of normal since 2022
Non-core funds that did sell took an average loss of 25%
Fund expiries and debt maturities are forcing owners to act
More than $1T of fund assets have been held for over 5 years
In a GP-led deal, the manager moves assets into a new vehicle to buy more time and capital
For an insurer, how a deal is structured changes its capital treatment as much as the property does, the host said
Higher going-in yields make core real estate attractive again, MacDonald said, not only distressed deals
1. Near the Bottom of the Cycle
The host said StepStone's view is that real estate trading prices are near the bottom of the cycle after the repricing that began when rates rose in 2022, while the outlook for property income is constructive. He asked McKnight to make the case.
Real estate has corrected; other asset classes have not, she said
"First of all, real estate has price corrected is near the bottom of the cycle." — Margaret McKnight
Apart from the latest jump in interest rates, she said, real estate was fairly priced, while other asset classes either rebounded quickly or never really corrected. Returns look poor in hindsight because prices fell, and she called that a signal to invest.
Loans grew too large for the income behind them
When borrowing costs rose, the loans became too big for the properties' income, leaving many owners with balance sheet problems.
"Only 17% of the loans that came due last year in the US were completely resolved. 800 million got deferred." — Margaret McKnight
She said there is pent-up need to sell and demand for structured deals that let owners avoid booking losses.
"A lot of managers feel like if they just had more time, they can grow out of a lot of these problems." — Margaret McKnight
Building has slowed, which supports income
Inflation and higher rates have made construction more expensive, so new starts and deliveries are finally slowing. She said the outlook for income growth is decent, despite worries about a weaker economy that has not yet arrived, and that there are pockets of outperformance for a manager who knows where to look.
She listed three reasons real estate belongs in a portfolio: current income that can fund distributions or reduce risk, protection against inflation shocks, and very low correlation to stocks and bonds, which she said matters to anyone worried about an overvalued stock market.
The market is global, but the dynamics are local, MacDonald added
"And so a given property type can be underperforming in one market because of an imbalance of supply and demand and outperforming in others." — Brendan MacDonald
He said that is why StepStone's global team compares the outlook for sectors and cities across markets.
