Real Estate Performance: Responding to Today’s Macro Backdrop

Understanding how macroeconomic forces impact commercial real estate (CRE) and its potential performance is crucial to constructing portfolios that can navigate the next decade of economic cycles. Let’s break down a few of the major forces at play and what we believe they mean for CRE in 2026 and beyond.

Interest Rates: The Primary Driver of Pricing & Activity

Interest rates influence virtually every aspect of commercial real estate, from capitalization rates to financing availability to transaction velocity. We believe the Federal Reserve may gradually cut rates throughout 2026, steepening the yield curve and reducing borrowing costs. We believe the 10‑year Treasury yield to land near 4.0%–4.5%, with potential downside if economic weakness grows.​

10-Year Nominal GDP Growth & 10-Year U.S. Treasury¹

Impact on Transaction Volumes: Higher borrowing costs created a gap between buyers and sellers, reducing debt availability. As rates soften, we are already seeing transaction volumes recovering, nearing their 2015–2019 averages.³​ This dynamic may also lead to more sellers coming back to market as pricing clarity improves.

 Lower rates = Improved deal economics = More capital potentially entering the market 

Inflation:  Helping Shape Today’s CRE Market 

Inflation shapes commercial real estate performance mainly through two channels: operating income and operating expenses. Headline inflation remains above the Federal Reserve’s 2% target, in our opinion indicating a gradual return to stability. Even if inflation continues to cool, demand in key sectors such as industrial, multifamily, and retail has allowed rents to continue rising. At the same time, elevated construction and financing costs are slowing the pace of new supply.

Impact on Real Estate: This combination of steady demand and constrained construction means inflation may be becoming supportive of CRE fundamentals. With fewer projects breaking ground, many markets are likely to see rent growth outperform long‑term averages, bolstering property income and helping support valuations.

Capital Flows: Competition Intensifies in a Capital-Scarce Environment

Capital scarcity has become an underappreciated but increasingly important macroeconomic force shaping commercial real estate from our perspective. Fiscal deficits require substantial financing, which can crowd out private capital and raise the cost of funds for real estate borrowers. At the same time, rising trends in AI infrastructure and manufacturing are absorbing enormous amounts of investment. AI-related infrastructure alone accounted for an estimated 35%–45% of U.S. GDP growth from late 2024 to mid‑2025,⁴ while manufacturing construction has surged nearly 190% since 2021⁵ due to reshoring and industrial policy.

Potential Opportunity for CRE: While these factors compete directly with commercial real estate for capital, they may also create new CRE opportunities, particularly in

Alternative sectors such as self-storage, medical outpatient buildings, senior housing, and student housing—all of which are propelled by demographic tailwinds.

Data centers, where AI‑driven demand is keeping development strong despite broader construction pullbacks.​

A New Cycle Is Emerging – Defined by Easing Rates, Cooling Inflation & Capital Scarcity

We see macroeconomic forces increasingly aligning in ways that support commercial real estate as it moves into a new cycle. Lower rates are beginning to revive deal activity, cooling inflation is helping strengthen purchasing power and income growth, and intensifying competition for capital is reshaping where investment ultimately flows, while also creating new opportunities in areas such as data centers and manufacturing‑linked industrial assets.

Adding in a slowdown in new supply alongside accelerating structural demand drivers, we believe a well-balanced portfolio may want to consider real estate sectors that are best positioned to benefit from tighter supply, demographic tailwinds, and the rapid expansion of AI‑driven demand.