Why Real Assets Matter in Capital-Constrained Economies: Israel and America

For much of the past decade, financial markets in both Israel and the United States operated under conditions of capital abundance. Low interest rates, ample liquidity, and accommodative credit environments reduced the cost of financing and allowed investors to tolerate long time horizons, high leverage, and uncertain cash flows. Asset valuations during this period were shaped less by immediate economic output and more by expectations of future growth. That environment has now shifted – as interest rates have risen and credit conditions have tightened, capital has become more selective, and the structure of investment returns has regained importance. In this setting, real assets – such as housing, infrastructure, logistics facilities, and energy assets – have assumed greater relevance within both economies.

The rise in interest rates in both Israel and the United States was not an arbitrary policy shift, nor simply a response to short-term market volatility. It reflected a convergence of structural pressures that emerged after the pandemic-era expansion. In both economies, unprecedented fiscal stimulus, prolonged supply-chain disruptions, and a rapid rebound in demand produced inflation levels not seen in decades. Central banks responded by tightening monetary policy to restore price stability and anchor inflation expectations, even at the cost of slower growth (Bank for International Settlements, 2023; Federal Reserve, 2024).

In the United States, inflation was initially driven by expansive fiscal policy, accommodative monetary conditions, and strong labor market recovery, which together pushed demand beyond the economy’s short-term productive capacity. As price pressures broadened beyond energy and goods into services and wages, the Federal Reserve concluded that inflation was no longer transitory and began raising policy rates aggressively to prevent it from becoming entrenched (Federal Reserve, 2024). Higher rates were intended to cool demand, tighten financial conditions, and reassert credibility in long-term inflation control.

Israel experienced a similar, though not identical, trajectory. Inflationary pressures were transmitted through global energy prices, import costs, and domestic housing dynamics, while tight labor markets added wage pressure. Given Israel’s openness as a small economy and its sensitivity to capital flows and exchange-rate stability, the Bank of Israel faced strong incentives to maintain interest-rate differentials consistent with global monetary tightening. Raising rates served not only to contain inflation, but also to limit currency volatility and preserve financial stability in an uncertain global environment (Bank of Israel, 2024).

Crucially, these rate increases were not merely cyclical adjustments. Central banks in both countries signaled that policy normalization would likely persist until inflation was firmly anchored, even if that implied a sustained period of higher real interest rates. This shift marked the end of an era in which markets could reasonably assume a rapid return to near-zero borrowing costs. As a result, higher rates functioned not just as a temporary headwind, but as a structural constraint reshaping capital allocation decisions across asset classes.

Economists describe a capital-constrained environment not as one in which capital disappears, but as one in which the marginal cost of capital meaningfully affects investment decisions. When borrowing costs rise and lenders impose stricter standards, projects must clear higher return thresholds to justify funding. This dynamic is well established in macroeconomic and financial research, which shows that higher interest rates and tighter credit conditions reduce investment by increasing hurdle rates and amplifying sensitivity to financing terms (Gertler & Gilchrist, 1994; BIS, 2023). Recent monetary tightening by both the Bank of Israel and the U.S. Federal Reserve has reintroduced these constraints across asset markets, particularly those reliant on leverage and long-duration cash flows (Bank of Israel, 2024; Federal Reserve, 2024).

From a valuation perspective, this shift alters how assets are priced. Financial theory holds that asset values reflect the present value of expected future cash flows, discounted by a rate that incorporates time and risk (Damodaran, 2023). When discount rates rise, assets whose value depends heavily on cash flows far in the future become more sensitive to error. Small changes in assumptions about growth or exit pricing can lead to large valuation swings. By contrast, assets that generate more immediate and recurring income are less exposed to this effect. Their value depends less on distant projections and more on observable economic activity.

This distinction helps explain why real assets tend to gain relative importance when capital is constrained. Their appeal does not stem from physical tangibility, but from cash-flow characteristics. Residential housing produces rental income linked to persistent demand. Infrastructure assets often operate under long-term contracts or regulated frameworks that provide predictable revenue. Logistics and energy assets monetize ongoing economic functions rather than discretionary consumption. These features make real assets easier to underwrite using conservative assumptions, a quality that becomes more valuable when capital carries a real cost (BlackRock Investment Institute, 2024).

Recent interest-rate data illustrates how quickly these dynamics take hold. Between early 2022 and late 2024, policy rates in both Israel and the United States rose by more than four percentage points. Over the same period, capitalization rates for income-producing real estate increased far more slowly than borrowing costs, compressing project-level returns. In practical terms, this meant that new development often failed to clear minimum return thresholds, while stabilized assets with existing cash flows retained relative value. The widening gap between financing costs and asset yields reinforced investor preference for assets that could perform without reliance on refinancing or aggressive growth assumptions (Federal Reserve, 2024; Bank of Israel, 2024).

Israel’s economy illustrates this adjustment with particular clarity. Structural factors – limited land availability, a concentrated banking system, and a relatively small domestic capital market – amplify the effects of higher financing costs. When credit tightens, investment activity often slows not because demand weakens, but because financing assumptions deteriorate. Development projects are especially sensitive to delays, as extended permitting timelines and infrastructure bottlenecks increase carrying costs and erode internal rates of return. In such conditions, assets that already generate income, or that require limited additional capital to do so, gain relative value compared with projects dependent on future refinancing or optimistic exit conditions.

For Israeli institutional investors, particularly pension funds, this environment reinforces the role of real assets as tools for liability matching and income stability. In an economy exposed to macroeconomic volatility and geopolitical risk, assets with predictable cash flows offer a way to align long-term obligations with underlying economic activity. This does not eliminate risk, but it narrows the range of outcomes in a manner consistent with fiduciary constraints (OECD, 2023).

The United States presents a contrasting case in scale but not in principle. Its capital markets are deeper and more diversified, with greater access to non-bank financing and a broader investor base. These features cushion the effects of capital tightening, but they do not remove them. As interest rates have risen, US lenders and investors have also become more selective, particularly in sectors where returns depend on refinancing or asset price appreciation. Federal Reserve assessments indicate that higher borrowing costs and tighter financial conditions have materially altered investment behavior, even in large and liquid markets (Federal Reserve, 2024).

In this context, real assets have attracted increased attention from institutional investors not because they promise exceptional returns, but because they offer durability. Infrastructure, multifamily housing, and logistics assets provide income streams that can be evaluated with relatively conservative assumptions. As safer financial assets now yield more, the opportunity cost of risk has increased, encouraging capital to flow toward investments that justify their risk through fundamentals rather than narrative.

Viewed together, Israel and the United States demonstrate a shared market logic. When capital is abundant, markets tolerate inefficiency, delay, and leverage. When capital becomes constrained, those tolerances shrink. Assets that generate cash flows tied to essential economic activity, require limited refinancing, and remain viable under higher discount rates gain relative importance. This is not a normative claim about what markets should value, but a descriptive observation about how they behave under tighter financial conditions.

The implications extend beyond investors. For policymakers, the experience of both countries highlights the limits of housing and infrastructure strategies that assume private capital will absorb unlimited risk. Regulatory uncertainty, prolonged approval processes, and policy inconsistency function as hidden costs that are magnified when financing is expensive. In capital-constrained environments, the design and timing of policy interventions matter as much as their intent.

The renewed emphasis on real assets in Israel and the United States is therefore best understood as a structural adjustment rather than a cyclical preference. As capital becomes more expensive and more discriminating, markets place greater weight on assets that convert investment into economic function with clarity and discipline. Recognizing this shift provides a clearer framework for understanding current investment patterns – and for thinking more carefully about long-term growth in capital-constrained economies.

Works Cited

Bank for International Settlements. (2023). Annual economic report 2023.

Bank of Israel. (2024). Monetary policy report: First half of 2024.

BlackRock Investment Institute. (2024). Global outlook 2024: Navigating a higher-rate regime.

Damodaran, A. (2023). Investment valuation: Tools and techniques for determining the value of any asset (4th ed.). John Wiley & Sons.

Federal Reserve. (2024). Financial stability report (May 2024).

Gertler, M., & Gilchrist, S. (1994). Monetary policy, business cycles, and the behavior of small manufacturing firms. The Quarterly Journal of Economics, 109(2), 309–340.

Organisation for Economic Co-operation and Development. (2023). Pension markets in focus 2023.