Fortress Executives on Why Private Capital Is Re-entering CRE Through Passive Structures

As commercial real estate markets continue adjusting to higher interest rates, refinancing pressure and shifting property fundamentals, private capital is increasingly re-entering the sector through more flexible and passive investment structures. Fortress Investment Group recently expanded its presence in the 1031 exchange and Delaware Statutory Trust market. The trend is being driven not only by high-net-worth investors, but also by individuals seeking greater diversification, professional management and tax-efficient exposure during a period of market dislocation.

David Hammerman, COO of Real Estate Equity, and Eli Edwards, Head of U.S. Real Estate Equity at Fortress Investment Group, discuss how private investors are following institutional capital into CRE, why passive ownership structures are becoming more mainstream and where they see the strongest opportunities emerging across multifamily, student housing and senior living assets.

CM: How would you characterize the current commercial real estate environment, and why do you believe market dislocation is creating opportunities for private capital today?

EE: The current commercial real estate market is nearing the bottom of a tough cycle. Real estate fundamentals—rents, occupancy, cap rates—have been in a down cycle since 2022 due to rising interest rates and elevated supply. Although interest rates remain as volatile as ever, fundamentals should start turning a corner within the next year or two. The new supply wave that really started in 2020-2022 is beginning to wane and in the process of absorbing. Once that happens, which is not today in most markets, we will start seeing positive real estate fundamentals for the first time in a while.

The capital markets are extremely volatile now given the continued whiplash from interest rates. In particular, public REITs (excluding data centers) are down over 10% since 2022 and currently trade below NAV. Going forward, asset selection and execution are going to be critical, something Fortress prides itself on. The volatile backdrop allows us to do what we do best and find deals at a very interesting basis while being primed to enjoy positive real estate fundamentals for the first time in a while.

CM: Why are DSTs and 1031 exchange vehicles becoming more mainstream in today’s market environment?

DH: It helps to start with the demographics: baby boomers hold approximately $20 trillion of wealth in real estate, with an estimated $2 to $4 trillion of that in investment properties. That generation is now squarely in the years where they’re looking to step back from the headaches of active ownership—fixing roofs, dealing with tenants, and the like.

However, that demographic faces a key problem: much of this real estate carries a negligible tax basis, meaning they’re staring at large tax bills upon sale unless they utilize a 1031 exchange. The catch is that a traditional 1031 is genuinely complex and unforgiving—you have just 45 days to identify a replacement property and 180 to close, you generally must acquire property of equal or greater value and replace your debt (or offset any reduction with additional cash) to fully defer, and at the end of it you still own and operate a building.

That’s where DSTs come in: they let an investor roll the proceeds out of small vacation homes and aging apartments and into institutional-quality, professionally managed real estate—trading up in property while satisfying the 1031 requirements and becoming truly passive, with a ready-to-close option that takes real pressure off those tight deadlines. Layer on the ability to diversify across asset types and geographies and an estate planning angle where deferred gains can ultimately be eliminated through the step-up in basis, and it’s no surprise more boomers and their advisors are leaning in.

CM: Direct property ownership has long been the default mental model for real estate investing among high-net-worth individuals. What is driving the shift toward passive structures — and is that shift permanent or cyclical?

DH: I think this shift is being driven by three things. The first is simply product availability—a decade ago, a high-net-worth investor looking for a passive, tax deferred exchange had limited, often lower-quality options, whereas today there’s a deep and growing menu of institutional-quality DSTs to choose from.

The second is demographic: the baby boomers who built much of their wealth through direct, hands-on ownership are now moving into retirement and actively looking to trade the headaches of active management for something passive.

The third, and perhaps most impactful is the democratization of alternatives—asset classes that were once the near-exclusive domain of institutions are now opening up to individual investors. The market is broadly expecting at least a doubling of private wealth allocation to alternatives over the next several years.

Passive real estate structures are riding that same wave. As for whether the shift is permanent or cyclical, my view is that the underlying drivers are structural—demographics and the democratization of alternatives don’t reverse with the interest-rate cycle—even if the pace of adoption will naturally ebb and flow with the broader real estate market and headlines in the alternatives investment space.

CM: What advantages do passive CRE investment structures offer investors compared to owning and managing properties directly?

DH: We think of this less as advantages versus disadvantages and more as a question of investor preference. There’s nothing wrong with active, direct ownership. Plenty of investors enjoy the control and the hands-on nature of it. However, active ownership comes with real headaches: sourcing and vetting deals, securing financing, managing tenants and leases, handling maintenance and capital expenditures, dealing with vacancies, and staying on top of taxes, insurance, and compliance. For investors who’d simply rather not deal with that burden, passive structures like DSTs unlock something powerful—the ability to tax-defer through a 1031 exchange into institutionally managed, generally higher-quality real estate than they could own or operate on their own.

The other advantage that often gets overlooked is estate planning: a single building is a notoriously difficult asset to divide among heirs—you can’t easily split one property three ways, which often forces a sale or leaves siblings as reluctant co-owners and co-managers. A DST interest, by contrast, is held as fractional beneficial interests that can be allocated cleanly across multiple heirs, each receiving their proportionate share without anyone being forced to manage a building or buy out the others. So, for the right investor, it’s not that passive is better than active—it’s that passive solves for a specific set of problems around effort, quality, and ease of transfer.

CM: Multifamily has faced affordability and supply pressures in some markets. Where do you still see attractive opportunities within the sector?

EE: Multifamily has faced supply pressures in certain markets such as the Sunbelt and continues to face affordability issues in older vintages. Although supply is coming down significantly from the peak, we believe it will still take time to absorb and are thus currently staying away from investing in areas like the Sunbelt.

However, demand tailwinds for multifamily in general are still there, especially as rates stay high and single-family homes remain unaffordable themselves. As such, we are focused on the low-supply markets in the Northeast and Midwest where it has been very difficult to build new product. If you can identify areas in which there are local demand drivers along with limited new supply, we believe buying at today’s reset basis will drive great returns.

We are also focusing on newer vintage properties not only due to the lower ongoing capital expenditures, but also due to the lower rent-to-income ratios from the tenants helps drive affordability.

CM: Senior housing has regained investor attention recently. What structural or demographic trends are driving renewed interest there?

EE: Renewed investor interest in senior housing is being driven by a converging set of structural and demographic tailwinds. On the demand side, the 80+ population—the primary consumer of senior housing—is growing at a 4.8% annual rate through 2030, more than double the pace of the prior 15 years (the “Silver Tsunami”).

Meanwhile, construction starts have fallen 69% from their peak due to high construction costs, expensive financing, and low development yields. As a result, absorption is running at roughly 2x pre-COVID levels, leading to occupancy today already returning to pre-COVID highs and accelerating.

Finally, the wealth of the 80+ population has grown substantially, far faster than senior housing rents over the past 15 years due to a rising stock and housing market, improving affordability, and giving sponsors meaningful pricing power. All this together is leading to high current and expected rent growth and general overperformance in the space. Senior housing remains one of our highest conviction theses.

CM: Student housing has remained relatively resilient compared to other CRE sectors. What fundamentals continue supporting the space?

EE: Student housing has enjoyed demographic tailwinds for the last 10 years, leading to outsized enrollment growth across universities. However, as a whole sector, that is expected to change going forward. Starting in 2026, the 18-year-old demographic is expected to decline over the next 10 years. Coupled with AI and a focus on vocational education, this is leading to headwinds for the sector going forward.

However, we believe there will be winners and losers. The larger, better schools with strong sports programs will continue to grow market share and enrollment, while the smaller private schools may fail. At Fortress, we pride ourselves on being able to sort through the data, of which there is plenty for student housing, and figure out the trends. We create a database every year with thousands of data points to rank the schools and pick the winners from losers. So, although we don’t want broad exposure to the space as a whole, we believe the winning schools offer a fantastic risk-adjusted return.

CM: Looking across the capital stack and the opportunity set today, where do you see the most asymmetric risk-reward in U.S. real estate equity — and what would change your view?

EE: Real estate in general is becoming more interesting today than it has in a while, especially when compared to other asset classes. People often forget that real estate has been in a recession over the past four years, even while the overall economy has done quite well.

However, real estate is extremely cyclical. When values decline like they have over the past four years, development becomes much tougher to pencil. The new supply started in 2021-2023 still needs to be absorbed, but new development has dropped off substantially. This is leading to a time in the not-too-distant future in which real estate rent and occupancy growth will start back in earnest, starting the next up-cycle.

If I had to pick one area with the most asymmetric upside in real estate equity today, I would pick senior housing. The demographic tailwinds are undeniable and just getting started. We can purchase class A properties in great locations at elevated going-in cap rates and benefit from the fundamental tailwinds. Although new supply has not started yet in this sector, we are starting to monitor this. If that were to ramp up in the coming years, that would make us more cautious. However, rents need to increase so much for new development to pencil that the deals purchased today are insulated to a degree.

Pictured l to r: David Hammerman an Eli Edwards