Geopolitical uncertainty, inflation and questions around the durability of traditional portfolio hedges have renewed investor interest in hard assets. More recently, growing concerns around AI deteriorating the collateral associated with software loans – particularly within private credit – have further reinforced this shift as investors reassess exposures where technological change may outpace underwriting assumptions.
In that context, real assets backed by tangible utility and contractual income streams are increasingly being viewed as a source of stability. This has accelerated interest in what might be described as ‘hard assets with low obsolescence’ – increasingly known as the ‘HALO’ stocks.
Real estate, by virtue of its fundamental utility, has emerged as a compelling allocation within this framework – however, there is an important nuance that is often overlooked here: not all hard assets, and not all real estate, are created equal.
For investors seeking additional exposure to the real estate asset class, access is not the challenge – after all real estate is available across public and private markets. What is crucial here is selectivity – avoiding the obsolescence trap depends on it.
This distinction is becoming more important in the current phase of the real estate cycle. In prior cycles, broad exposure to real estate could deliver acceptable outcomes through market beta. Today, outcomes are more likely to be determined by asset-level characteristics and the ability to sustain relevance over time.
Following a period of repricing driven by higher interest rates, many real estate assets might appear attractive on a valuation basis. Lower entry prices alone do not mitigate obsolescence risk, however – in some cases, they may simply reflect it.
At the same time, structural changes in how space is used – and how assets are regulated and financed – are accelerating. This combination means the dispersion between the performance and long-term value of assets is widening between durable and obsolete assets and, with it, the consequences of getting asset selection wrong.
Obsolescence is an economic outcome
A range of external forces – for example, policy and regulatory change, sustainability and climate risks, socio-economic and demographic trends, and sector-specific supply dynamics – shape how obsolescence develops over time. At the asset level, these drivers lead to obsolescence that manifests in three ways: physical, functional and economic.
While physical obsolescence reflects the natural wear and aging of a building, functional obsolescence arises when a property’s design, layout or infrastructure no longer meets evolving occupant demand. Importantly for investors, economic obsolescence occurs when these factors, combined with external forces such as shifts in regulation, erode an asset’s value.
“Access is not the challenge for investors – after all real estate is available across public and private markets. What is crucial here is selectivity – avoiding the obsolescence trap depends on it.
Assets do not become obsolete simply because conditions change – they become obsolete when the cost and complexity of adapting to those changes is no longer supported by their value.”
In practice, these forms of obsolescence are closely linked. External changes in policy, technology and user behaviour often appear first as functional shortcomings or increased physical requirements – whether through new building standards, energy systems or tenant expectations.
Addressing these challenges typically requires capital investment – the critical question being whether that capital can be deployed in a way that preserves or enhances cashflow and long-term value.
This is why obsolescence is ultimately an economic outcome. Assets do not become obsolete simply because conditions change – they become obsolete when the cost and complexity of adapting to those changes is no longer supported by their value.
Real estate demand is evolving
The past decade introduced a more structural shift in how real estate is used, influenced by the proliferation of technology. Remote working and the rise of e-commerce are often cited as defining trends. In reality, they are part of a broader repricing of what tenants and users expect from space.
Office occupiers are placing greater emphasis on quality, flexibility and amenity. Retail has become more experience and convenience-driven. Industrial demand is being reshaped by supply-chain reconfiguration in a deglobalising world. The proliferation of AI is creating a step-change function in the demand for data-centres. Across sectors, performance is increasingly concentrated in assets that align with these evolving needs.
The result is a growing divide – not just between sectors, but within them. This helps explain the ‘K-shaped’ recovery observed in recent years: assets aligned with structural demand trends continue to perform, while others struggle to remain relevant. Importantly, this fragmentation is not static. As user requirements continue to evolve, assets that are competitive today may require ongoing adaptation to remain so.
Even within data-centres, one of the most sought-after segments of real estate, the gap between durable and potentially obsolete assets can be significant when they require significant capital infusion to adapt to evolving technology needs.”
The current enthusiasm around certain subsectors illustrates this point. Data-centres, for example, are often viewed as quintessential ‘hard assets’ benefitting from powerful structural tailwinds tied to digitalisation and AI. The reality, however, is more nuanced for these capital-intensive assets.
A growing number of data-centres are being developed in tertiary markets, where power is more readily available and development constraints are lower. While these locations can support certain workloads today, they carry higher obsolescence risk.
Assets are often built for single users, increasing tenancy concentration and reducing demand flexibility, and may struggle to adapt as technology evolves and AI use cases place greater emphasis on low latency, connectivity and proximity to end-users.
On the other hand, primary assets in core markets benefit not only from lack of power availability, limiting new supply, but also from proximity to end-users, dense network connectivity and the low latency required for real-time data processing – particularly for AI inferencing. These irreplaceable assets are protected from competitive new supply and positioned to garner demand throughout the lifecycle of AI adoption and the digitalisation of the global economy.
Even within one of the most sought-after segments of real estate, the gap between durable and potentially obsolete assets can be significant when they require significant capital infusion to adapt to evolving technology needs. In practice, maintaining relevance requires active ownership, ongoing investment and operational expertise. Assets must be repositioned and upgraded to keep pace with evolving demand and regulatory expectations.
Implications for investors
For investors, low obsolescence should not be assumed – it must be underwritten. This means focusing on demand durability, competitive positioning and the path required to sustain that positioning.
In a market defined by dispersion, outcomes will be driven less by asset class allocation and more by selection and execution. Avoiding high-obsolescence risk requires a disciplined and granular approach.
Ultimately, HALO is not an inherent characteristic of real estate. It is the result of informed underwriting, active management and differentiation between assets that are simply tangible and those that are truly durable.
Uma Moriarity is senior investment strategist and global head of sustainability at CenterSquare Investment Management
