At the midpoint of 2026, we see the broader economy remaining resilient but uneven, shaped by persistent inflation, geopolitical volatility, elevated interest rates and a growing reliance on business investment, particularly AI-related spending, to support growth.
For commercial real estate, this backdrop reinforces a market in the early stages of a new cycle, where higher borrowing costs and selective capital continues to shape market activity, even as transaction volume improves and values show early signs of stabilization, while sharply reduced construction pipelines are beginning to reset the supply-demand balance. As new development slows and income has become the primary driver of returns, the next phase of the cycle is increasingly defined by asset-level fundamentals, durable demand drivers and disciplined execution.
A New Cycle: Mid-Year Thesis Update
Halfway through the year, our broader investment thesis outlined in the 2026 Outlook remains largely unchanged, but the shorter-term outlook has evolved. Growth continues to be driven by productivity and capital investment. While long-term demographic trends remain an important structural force supporting a stable lower-inflation environment, inflation has remained more persistent in the near term than anticipated, delaying the path toward lower interest rates. At the same time, capital has become more selective, reflecting tighter financial conditions and global risks.
All the while, most economic indicators remain within expected ranges, reinforcing the view that while the path forward may be uneven, the overall direction is consistent with a market moving into its next phase.
Forecasts vs Actuals1
| Metric | January Forecast for 2026 | Mid-Year Actual |
| Real GDP Growth | 1.5% - 2.0% | 1.6% |
| 10-Year Treasury | 4.0% - 4.5% | 4.5% |
| Fed Funds Rate | Declining (rate cuts) | Stable (no cuts or hikes) |
| Unemployment Rate | < 5.0% | 4.2% |
| CPI Year-Over-Year | ~ 2.0% | 4.2% |
Macro Update: Short-Term Pressure, Long-Term Anchors
The macro environment in 2026 is expected to be defined by a combination of short-term disruptions and longer-term stabilizing forces.
Recent inflation has been shaped largely by external shocks, including rising energy prices due to the U.S.-Israeli conflict with Iran and tariffs. Historically, this type of inflation has often acted as a constraint on demand rather than a sustained driver of price growth, which suggests it may ease over time.
Interest rates also remain elevated, with the Federal Reserve taking a cautious wait-and-see approach. This has reinforced a “higher-for-longer” environment, requiring investors to adjust expectations around borrowing costs and returns.
We believe longer-term structural trends will balance these pressures. Aging populations, slower labor force growth and elevated debt levels are expected to support a lower-growth, lower-inflation backdrop. Japan offers a useful example, where an aging population and high debt levels have continued to weigh on growth and keep inflation relatively subdued despite years of policy support.2 Over time, similar demographic and debt pressures are expected to play a larger role in shaping the U.S. economy.
Another defining feature of this environment is the shift toward productivity-led growth. Business investment remains strong, especially in technology, while employment growth has slowed. This reflects an economy increasingly driven by efficiency and innovation, rather than expansion of headcount.
Cycle V Begins: Mid-Year Thesis Update
From our perspective, within commercial real estate, there are growing signs that the market is entering a new cycle, supported by the view that valuations bottomed in 2025 and values are showing early signs of stabilization. Transaction activity is improving from the 2023 low, and although lower than the 2021 and 2022 peaks, the market appears to be gradually re-opening as valuations stabilize.3 At the same time, the way returns are generated has fundamentally shifted. Income is now the dominant driver of performance, placing greater emphasis on asset quality, tenant demand and operational strength.
This marks a departure from prior cycles and appears to signal a more disciplined, fundamentals-based investment environment.
Transaction Volume3
The Supply Story: A Constrained Pipeline
One of the more important forces shaping the outlook is the sharp decline in new construction.
Development pipelines have declined across sectors, with multifamily experiencing one of the most significant pullbacks, marking its lowest level since 2011, down 76% from the early-2022 peak. Higher construction costs and financing challenges have slowed new starts, while existing projects are gradually being absorbed.
This dynamic is setting up a tighter supply environment over time. As demand recovers and fewer new assets are delivered, a supply-demand imbalance may support stronger rent growth and improved fundamentals over the next several years.
Sector Insights:Early Signs of Strength
Across key sectors, fundamentals are beginning to improve as durable demand drivers translate into stronger real-time performance.
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Multifamily remains resilient, supported by steady demand and improving rental trends.
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Self-storage is showing early signs of stabilization, with occupancy improving after a period of softness.
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Medical outpatient buildings are supported by improving investment activity and higher demand.
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Senior housing demand continues to grow as demographics strengthen and new supply remains limited.
Bottom Line: A Cycle Defined by Fundamentals
Despite short-term uncertainty, we believe that the long-term thesis over the direction of the market has not changed and the drivers remain clear. Productivity-driven growth, demographic demand, constrained supply and income-focused returns will define the next phase of commercial real estate.
The path forward may not be linear, but we hold the view that commercial real estate is entering a new cycle and the current transition period may create opportunities for those focused on long-term sector-specific fundamentals.
1 Fred: GDPC1, DGS10, FEDFUNDS, UNRATE, CPIAUCSL
2 World Bank, Population Growth for Japan [SPPOPGROWJPN], retrieved from FRED, World Bank, Inflation, consumer prices for Japan [FPCPITOTLZGJPN], retrieved from FRED
3 CoStar