Commercial Real Estate mid-year outlook

The CRE market has been remarkably resilient so far in 2026. Despite long-term Treasury yields ticking higher over the past several months, transaction volumes were up solidly in the first half of 2026. Valuations have been mixed, with private office and retail prices edging higher and apartment and industrial prices taking a small step backward since the start of the year. That noted, public REIT equity prices have broadly moved higher over the balance of the year, suggesting investors remain constructive on the sector's outlook.

Don't get us wrong. The current stance of interest rates is a headwind for transactions, hardly conducive to meaningful cap rate compression and presents a challenging backdrop for refinancing. Several forces are still working in the CRE market's favor, however.

For one, CRE lending is still active. Even with recent market volatility, CRE originations activity advanced in the first half of 2026, continuing an upward trend that has been evident since early 2025. The cost of capital matters. Of course. But so does capital availability, and at least for now, capital still appears to be flowing.

And then consider the following: New supply is set to become increasingly scarce over the next several years. Set aside data center construction for a moment. New CRE starts have barely budged this year, remaining stuck at a pace not seen since 2013 when activity was recovering from the Global Financial Crisis. Moreover, the likelihood of a meaningful rebound seems low, given high capital costs and rising material prices should continue as a significant limitation for new projects.

Meanwhile, tenant demand has remained sturdy so far this year. On balance, net absorption for industrial, retail, and multifamily improved in the first half of the year, while hotel occupancy turned higher. Even office posted positive net absorption over the past six months, building off of 2025's second half turnaround. As we elaborate below, each property type has its own idiosyncratic forces driving its performance. Yet, the overall buoyancy of demand is consistent with economic activity also being resilient this year. Point being: we expect GDP growth to maintain a positive trajectory over the next several years, and CRE demand should perform similarly.

So yes, vacancy rates are still broadly elevated and exerting downward pressure on rent growth for most major property types. But a thin development pipeline and expected sturdy property demand ahead suggest market fundamentals are likely to become more balanced in the not-too-distant future.

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