Keeping it real: Real assets, real rates and inflation

The post-COVID environment has provided a crash course in how a volatile inflation and interest rate environment can impact portfolios; inflation can support nominal cash flows, but higher real rates can still compress asset values. This means that the key question is whether inflation translates into net income growth quickly enough, and whether investors are willing to pay the same multiple for those cash flows when the risk-free rate is higher. Across private real estate, infrastructure and transportation, the same two channels dominate outcomes—cash flow repricing and discount rate repricing—but the mechanics and speed of those channels differ meaningfully.

This dynamic should be viewed through the interaction of three variables: income growth, real interest rates and risk premia.

• Inflation lifts nominal revenues in many settings, but it also lifts operating costs.
• Real rates influence both financing costs and the discount rate investors apply to future cash flows.
• Risk premia determine whether a rise in the risk-free rate is partially offset by investors accepting a smaller spread for owning a given set of private cash flows.

In practice, the largest repricing occurs when multiple variables shift at the same time; for example, when income growth expectations roll over at the same time discount rates rise, or when higher rates coincide with tighter financing availability and a higher premium demanded for uncertainty. Conversely, repricing can be limited if income growth expectations increase as discount rates rise, as this higher cost of capital often constrains supply.

Real estate

The linkage between inflation and property-level cash flows makes these dynamics immediately visible in real estate, especially given the sensitivity of valuations to macro developments. The 2020–2022 period was the more favorable version of this dynamic: reflation and reopening dynamics supported strong rent growth, and values rose by more than rents as multiple expansion was supported by a genuine improvement in fundamentals.

From 2023 onward, however, the regime shifted. The increase in rates was large enough that rent growth was unable to offset discount-rate pressure. At the same time, fundamentals in several areas normalized as rent growth softened and new supply arrived. This created a double hit that is familiar to private market investors: slower expected NOI growth and a higher required rate of return.

Different areas of the real estate market respond differently to these dynamics, but across all sectors, inflation repricing through leases does not immunize the asset from higher real rates. Apartments offer the cleanest inflation linkage because leases are short and rents can reset quickly, yet the sector remains exposed to affordability and supply cycles. In an environment where new deliveries rise and rents are under pressure, even modest changes in rent growth expectations can compound the valuation impact of cap rate expansion.

Industrial followed a similar post-pandemic arc, with strong rent moves in the early period reinforced by an acceleration in e-commerce activity, aggressive underwriting and cap rate compression. When real rates rose, however, that optimism premium became vulnerable, and industrial assets began to behave less like a one-way inflation hedge and more like a duration-sensitive asset. The nuance is that robust e-commerce demand during the pandemic slowed as heavy supply continued to be delivered; fast forward to today, and supply has declined as advanced manufacturing and the reshoring of critical industries is helping to bolster the fundamentals.

Office illustrates how higher real rates and inflation can change valuation not only through the cap rate, but also through underwriting conservatism. Higher operating and capital costs, combined with greater uncertainty around leasing, can lead to a series of small assumption changes that reduce stabilized NOI and amplify pressure on valuations. The reality is that price discovery, especially for lower quality assets, is still early days; at the same time, debt availability is hard to come by for anything but the highest quality buildings.

On the other hand, retail provides a useful contrast; parts of the sector offered higher entry yields going into the pandemic, which helped cushion the impact of rising discount rates. More broadly, inflation can provide indirect support if tenant sales remain healthy, which has manifest in the form of strong NOI growth for the sector. While higher real rates can still reduce the market’s appetite for risk, the appealing fundamental backdrop has helped support demand.

Infrastructure

The inflation linkage in infrastructure assets is typically driven by contracts and regulations. Furthermore, the liability structure often reduces immediate rate sensitivity. The key is that infrastructure does not have a single “inflation beta.” In the U.S., many subsectors rely more on fixed escalators and commercially negotiated repricing than explicit CPI indexation; power is a subsector where fixed escalators are prevalent. Regulated utilities offer a different form of linkage that is often indirect, coming through ratemaking and allowed returns rather than indexation to CPI. Certain concession-like assets can sit between these regimes, with pricing mechanisms that may be formulaic, periodic or subject to political and regulatory lags. For core infrastructure investors, inflation linkage is less about whether there is a CPI clause and more about whether inflation translates into net income growth after operating costs and maintenance capex. The key determinant of performance is the ability to avoid margin erosion as costs rise.

The post-2023 regime is a reminder, however, that contractual inflation linkage does not automatically protect NAV. Even if nominal cash flows rise with escalators or regulatory recovery, higher real rates can compress the present value of those cash flows. What has differentiated core private infrastructure since 2020 is that equity discount rates have often remained relatively steady; put differently, as risk-free rates rose, the equity risk premium compressed. That risk-premium behavior suggests that investors increasingly value the diversification and downside characteristics of essential-service, contracted cash flows and may be willing to accept a lower spread for owning them in private form.

Debt structure reinforces this difference versus both real estate and value-add strategies. Core infrastructure portfolios frequently carry long-dated, predominantly fixed-rate debt with long-weighted average maturities, which dampens the immediate cash flow impact of higher base rates. Core strategies also tend to be anchored in essential services, while value-add and opportunistic strategies are more exposed to the parts of inflation that are harder to hedge—construction and expansion capex inflation, merchant price exposure, volume risk and timing risk.

Transportation

Transportation—particularly shipping, aircraft and railcar—highlights a third repricing mechanism that is more market-clearing and cycle-driven. Inflation and real rates still matter, but outcomes are often dominated by how quickly contracts reset, whether key costs are passed through and whether capacity is tight. The rate channel impact comes through primarily via changes in the cost of debt, and like infrastructure, the response in many strategies has been to keep debt predominantly fixed, manage maturities carefully and reduce leverage when it is no longer accretive. This is especially relevant in aircraft and railcar leasing, where liability management and lower blended capital costs are core to the ability to compete for assets especially in secondary market transactions and where debt maturity ladders can prevent the portfolio from being forced into near-term refinancing at unfavorable rates. At the same time, investors can match the duration of loans and leases and proactively reduce leverage in a rising rate environment.

On the income side, transportation often exhibits a relationship that can look counterintuitive through a pure rates lens: asset values and lease rates can move together, and correlate positively with interest rates, which can help keep net levered yields stable. Rates can increase with inflation but can also be driven by supply and demand factors such as geopolitical disruption and trade route shifts. In shipping, supply constraints such as shipyard delivery backlogs and limited vessel availability can support lease rates and utilization, allowing renewals and re-leases to reset higher as financing costs rise. In railcars, renewal economics can improve when fleet availability is tight or when certain equipment types are scarce, reinforcing lease pricing power.

Inflation itself often enters transportation through fuel, insurance, labor and maintenance cost increases. Rising fuel and insurance costs are often passed through in many commercial structures, particularly in shipping, shifting the inflation question toward crew wages, maintenance and parts availability, which requires careful management through robust operations and an inflation margin that is built into transaction underwriting. Fund construction also influences what investors observe: laddered lease and contract durations can smooth reported outcomes, producing a blended proxy of market conditions rather than a real-time reflection of spot-market volatility.

Investment implications

The bottom line is that there are clear similarities and differences across all three asset classes when it comes to the interaction of inflation, rates and risk premia. Real estate reprices inflation quickly through leases but is highly sensitive to cap rate expansion and underwriting conservatism. Infrastructure reprices inflation through contractual and regulatory frameworks, and core portfolios can be cushioned by long-duration, fixed-rate liabilities and risk premia can be compressed based on investor demand. Transportation reprices through renewal mechanics and capacity cycles; when supply is constrained and pass-through mechanisms work, cash flow repricing can dominate macro headwinds, but where labor and maintenance inflation cannot be recovered, inflation requires active management.

Looking ahead, performance will increasingly be driven by current income and potential growth, rather than multiple expansion. This makes repricing dynamics and the risk premia investors are willing to harvest increasingly important drivers of return. At the portfolio level, it is also increasingly important to separate the risk-free rate from the equity risk premium in scenario thinking. A higher real-rate world does not force identical repricing across private assets; it forces clarity on what portion of return is coming from durable income, what portion is coming from growth and what portion—if any—still depends on the market paying a richer multiple in the future.