A New Dawn in Real Estate: 2026 U.S. Commercial Real Estate Outlook

REAL ESTATE | December 2025

Key Questions and Preview Answers for 2026

1- If real estate prices troughed in 2024, why are investor allocations to real estate still shrinking?
Because of the magnitude of CRE underperformance since 2021.

2- What are the effects on real estate from K-shaped household income growth, and AI effects
on the labor market?
Risk for select office and retail segments, although office is still priced too low in select markets/
segments. A tailwind for select residential.

3- How long do multifamily margins compress in the Sun Belt?
We expect late 2027.

4- Is industrial still mispriced for growth or correctly priced for stability?
We have high-conviction views on infill vs regional warehouse pricing.

5- Are data centers in a bubble?
Maybe, but modern portfolio theory has something to say too.

Economic Outlook

Over the past year, high-income households have increasingly become the primary driver of
consumption growth. The top 10% of earners accounted for 50% of spending in 2Q25 (1),
which was the highest since data collection began in 1989. Meanwhile, real disposable income growth for the bottom ~80% slowed materially, as pandemic-era savings were exhausted and debt servicing costs increased,
particularly on revolving credit balances (2).

We expect this disparity in income growth to intensify in 2026, and this composition matters for
real estate.

In 2026, we expect leasing demand across most product types to be tied less to national aggregates
and more to where high-value employment and wage gains concentrate. That supports coastal
multifamily and select office submarkets, while tempering some Sun Belt locations.

At the same time, we believe an unrelated factor comes from an AI-linked labor adjustment.

AI adoption had a measurable impact on the labor market in 2025. Challenger, Gray & Christmas
reported nearly 50,000 job cuts attributed to AI, year to date; however, this figure is likely conservative,
as AI has also contributed to a decline in job openings. Estimates of total white-collar jobs eliminated
over the past 18 months range from 50,000 to 4,000,000, with only partial offsets from new roles in
the AI sector. We believe entry-level and administrative positions have been among the most affected,
but the net impact across the labor market remains uncertain. Over the next several years we expect
a reconcentration of office demand into markets with deep talent pools and industry clusters. Office
performance tied to generalized “return to office” narratives is likely to continue to be unreliable.

These labor market shifts and evolving demand patterns are reshaping the landscape for capital flows
and asset valuations. Against this backdrop, we examine how these forces are reflected in current
capital market conditions.

Capital Market Conditions

Private U.S. commercial real estate values bottomed in 4Q24 (NCREIF Property Index), with office the
last sector to trough in 2Q25. Transaction activity (CRE liquidity) improved throughout 2025 as bid-ask
spreads narrowed, although meaningful capital re-entry has not yet occurred. Allocation targets have
adjusted downward in many institutional portfolios, in some cases through formal revisions rather than
slower deployment.

This divergence between valuation stabilization and capital behavior is not unusual; however, the
drivers differ from those in the post-2008 cycle, when aggressive monetary easing, distressed pricing
and a slow but broad rebound in employment provided clarity to fundamentals across all property
types. Drawing on industry surveys, investor discussions, public pension disclosures and themes from
the Fall 2025 PREA conference, we see allocation targets trending lower. The primary driver: CRE
returns have lagged other major asset classes over the past three years. This has largely been due to
falling property prices, and investors are responding by recalibrating CRE allocation targets lower
rather than making new investments.

To show the magnitude of this underperformance, we compare the one-year performance across
major asset classes since 1998 (Exhibit 1). The table’s color coding considers the risk profile of different
investment sectors; for instance, government bonds returned 10% in 2011 and are coded as the best
sector with dark green, even though private CRE slightly outperformed on an absolute basis with an
11% return. Relative performance trends over the past four years have contributed to higher redemption
queues for open-end core real estate funds. Redemption queues began to rise in 2022, peaked at $41
billion in 1Q24 and have since fallen to just below $25 billion (3).

This persistent underperformance and shifting investor sentiment have direct implications for portfolio
strategy. With capital allocations in flux, it is critical to reassess sector positioning and identify where
fundamentals and pricing offer the most compelling risk-adjusted opportunities.

Strategy Guidance

Where are the opportunities and risks today? Here are the property types we expect to perform, best
to worst, in 2026, considering both spot market pricing and current fundamentals.

We update property type rankings monthly and assign ratings across 21 commercial real estate
sectors for portfolio managers and select public reports.

Each year, we also backtest the ratings. This year, we found:

• An unlevered portfolio modestly tilted toward overweight types, and away from underweight, would
  have returned 6.5% from 2020 to 2024, while the NCREIF Property Index (NPI) benchmark was 3.6%.
• Allocating only to overweight property types (equal weighted) would have resulted in an unlevered
  annualized return of 10.2% versus the 3.6% benchmark.
• Outperformance may be overstated, due to the assumption of immediate annual shifts, and
  understated because the analysis uses unlevered returns.
• Bear in mind that these returns are hypothetical and included for illustrative purposes only. They
  are not actual returns and are not indicative of future results.

Backtesting isolates predictive signals. Our monthly regional survey and REIT options pricing have
proven most reliable, while demographic shifts and cap rates offer limited value. Within each sector,
we also believe there are important strategies to adopt or avoid. Leading into 2026, we have views
on markets and sub-strategies within the multifamily, industrial, office and retail segments. To
operationalize these sector views, we provide detailed guidance on the major property types.

Multifamily

We begin with multifamily, where supply-demand dynamics and market selection remain central
to performance. The multifamily sector has seen strong demand but continues to face elevated
supply, particularly in Sun Belt markets. We believe national apartment vacancy is at its peak and will
gradually lower throughout 2026, aided by a continuing slowdown in construction. Renter demand
will be supported by high homeownership costs.

High Conviction:

• Stabilized multifamily in supply-constrained markets such as Chicago, San Francisco, New
  York, Palm Beach, Tampa, Seattle, Orange County and San Diego. There may be opportunities
  to acquire Class A assets below replacement cost in markets where vacancy is tight.
• Multifamily development in low-supply, high-barrier markets. Similarly, markets that are supply
  constrained also present development opportunities.

Caution:

• Oversupplied multifamily markets such as Austin, Charlotte, Nashville, Denver, Phoenix and
  Atlanta. Aggressive underwriting persists despite elevated vacancy rates and flat-to-negative net
  effective rent growth. Federal immigration reform further impedes the recovery in fundamentals.
• Value-add apartments. Deals are being priced with aggressive rent growth assumptions,
  particularly in the Sun Belt. Investor competition for these assets is high.

Industrial

Industrial has been a top performing sector for the past decade, but now supply is outpacing demand.
Despite trade uncertainty, net absorption is expected to pick up in 2026 with vacancy peaking around
the middle of the year.
High Conviction:

• Industrial with medium WALT. Longer weighted-average lease term (WALT) is now favorable
  given softened fundamentals and pricing. Acquire assets with below-market rents and mark to
  market in years five to seven.

Caution:

• Industrial with lower WALT. Pricing is too aggressive on industrial properties with short-dated
  WALTs. Vacancy is also rising in the industrial sector, particularly in the southern U.S.

Office

Signs of recovery have emerged in the office sector. The national average vacancy rate has fallen by
30 basis points (bps) since the start of the year, reaching 18.7% (6). In 3Q, net absorption (new leased
space minus space being given up) was the strongest in four years, reaching over 14 million square
feet (7). We expect to see continued improvement in the office sector over the next year, though B & C
office will lag higher-quality product. Investors prefer assets with longer WALTs, as in-place rents may
exceed market rents.

One of the most counterintuitive findings we’ve had in the last year is that properties with subleased
space have been outperforming assets with leased, but physically underutilized space. In MIM’s debt
and equity office portfolios, our worst investments have been in those with physically vacant space,
while those with subleased space have somewhat consistently surprised to the upside by converting
the subleases into long-term leases.

High Conviction:

• Higher-quality office assets. There are compelling yields for well-located, well-appointed assets,
  especially in markets with strong talent clusters.
• Repositioning existing office stock. In markets where prime office supply is low, there are
  opportunities to upgrade A/A- stock into A+.
• High conviction in preferred office markets based on pricing and fundamentals.
  – Primary: Dallas, Orange County, Sacramento, Fort Lauderdale, Miami, Orlando, Palm Beach, Tampa.
  – Secondary: Cincinnati, Louisville, Las Vegas, Providence, Norfolk.

Caution:

• Investors and investment managers materially underestimate the costs required to keep a building
  current and leased. This trend predates the pandemic and has persisted for at least three decades.
• Office to multifamily conversion. These are large deals, and assets are difficult to reposition.
  Many transactions have aggressive underwriting assumptions.

Retail

The retail sector continues to see vacancies near historic lows, driven by a healthy consumer and a
dearth of new supply over the past decade.

High Conviction:

• Neighborhood centers and unanchored strip. Selectively acquire exceptional centers in high
  demographic areas with lower CapEx drag. Accretive debt is available at acquisition.

Caution:

• Grocery-anchored retail. There is a significant premium for having a grocer in a retail center.
  Grocery-anchored retail centers are exposed to anchor tenant risk, particularly due to Wal-Mart
  expansion and rising e-grocery adoption.

Other Areas of Opportunity

Beyond the core property types, several other sectors present distinct opportunities and risks for 2026.

High Conviction:

• Defensive income. Medical office, net-lease retail, net-lease industrial and self-storage.
• Senior housing. Demographic trends are favorable for the sector, and there has been very little
  new supply added in recent years. Asset pricing is favorable.
• Data centers. Strong demand from AI-driven workloads, robust connectivity needs and projected
  revenue growth of ~7% compound annual growth rate (CAGR) make this sector compelling. Strategic
  markets like Dallas, Northern Virginia and Chicago also offer attractive pricing. While technological
  obsolescence and a slowdown in AI funding are risks, these risks are largely idiosyncratic and
  not strongly correlated with broader economic cycles. According to Modern Portfolio Theory,
  assets with distinct risk drivers, such as data centers, provide diversification benefits within a
  mixed real estate portfolio. This allocation can enhance risk-adjusted returns by reducing overall
  portfolio volatility, even if individual sector risks remain. Additional considerations include potential
  oversupply, regulatory hurdles and cost volatility from tariffs and urban site constraints.

Caution:

• Student housing. Demographic trends are not favorable for the sector as the population of
  college-age students is declining. Construction pipelines are also concerning across many
  college campuses. Although this may seem contradictory, we maintain a favorable view for
  debt investment in student housing. For lending, our focus is on larger universities with strong
  enrollment and high barriers to entry.

Appendix and Forecast Tables

With sector-level guidance established, the following appendix provides supporting forecasts and
quantitative detail for reference.

Authors

Appendix and Forecast Tables

1- Source: Marketplace. Nearly half of U.S. retail spending comes from top 10% of earners. Data as of September 2025.
2- Source: Federal Reserve. Financial Stability Report, November 2025.
3- Source: MIM, NCREIF. Data as of 2Q 2025.
4- Note: Commercial Mortgages utilizes a 50/50 weighted average of Giliberto-Levy Index and Bloomberg CMBS Investment Grade Index. Private Equity utilizes the Cambridge PE Index. Private CRE utilizes NCREIF ODCE returns but with a 2-quarter look-ahead to help offset appraisal lag, Values represent the 1-year total return for each sector. Best performing sector for each year assessed by comparing average historical performance with a risk adjustment. Returns may not be comparable due to mark-to-market lag
and other factors and should not be relied on for portfolio modeling or investment decisions.
5- Based on November 2025 Delphi consensus survey of MIM’s acquisitions staff for current market pricing, aggregated portfolio information, and ratios from vendors including CoStar and Green Street. External sources include REIT and market information from MIM vendors including CBRE-EA, CoStar, and Green Street. Note: Pricing analysis is only focused on Core and Stabilized assets.
6- CBRE-EA, 2025Q3
7- Source: CBRE Econometric Advisors. Data as of 3Q 2025.

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