Matt Malone outlines selective opportunities and sector shifts shaping U.S. commercial real estate in 2026.
So, we’re talking about commercial real estate, and we’re looking back a little bit at 2025 and looking forward into 2026. And I think as we look forward into 2026 for the U.S. commercial real estate market, opportunity remains for selective deployment. And what I mean by that is commercial real estate continues to be a very market-driven sector, and there continue to be different dynamics locally for different property types. So, it is a complex market, which means you have to be very careful navigating, but for investors that are selective, opportunities remain.
Looking back at 2025, we see transaction volume slowly trending up and getting closer to the long-term trend line of around half a trillion dollars of commercial real estate volume a year. The thing that remains challenging is the higher-for-longer interest rate environment, which has continued to put pressure on many property types where cap rates were pushed down during the ZIRP environment.
This means that the math on many property types, including some of the more loved property types like multifamily for core stabilized properties or even light value-add, is challenging because interest rates remain high and sellers do not want to sell at cap rates that allow for new buyers to put positive leverage in place off the bat. This means that you have to grow NOI in order to generate attractive returns.
One of the challenges with growing NOI right now is, for many property types, expenses are going up. So, while you may be able to grow top-line revenue and rents, expenses may be growing at a quicker rate than those revenues. So, a lot of factors at work in commercial real estate, which means investors need to be careful navigating this environment.
The thing with commercial real estate is that it’s such a big market, and each sector is different, and then each city is different as well. So, some of the things that we’ve seen happening, and some of the things we’re watching going forward, is we’ve seen this reversal of many trends that we saw during COVID.
One of the things that was maybe not will be surprising to some, not as surprising for us this year, is that office has seemed to continue to stage a comeback. We’ve talked about this for a while. We’re seeing it play out in actual transactions. New York office is back, leasing activity is up, and we’re seeing office market activity increase. And especially with very limited new supply, there are opportunities in office, which is a sector that everybody ran away from. So, you see limited capital available to invest in office and more and more positive trends in the fundamentals, which is an interesting setup for office.
We even see San Francisco office, due to AI trends, AI hiring for AI companies in San Francisco. We even see San Francisco office, which was the most hard hit, starting to slowly come back. So, we’re seeing these reversal of trends, and we’re seeing that with a lack of capital flowing to office, both on the equity and debt side. It’s an interesting setup for investors who are willing to take some risk.
If you compare that to something like multifamily, which has long been a darling of the commercial real estate industry, that sector continues to see some challenges. That goes back to the core math that’s involved. Cap rates on transactions continue to remain on the lower side. They’re inching up, and getting positive leverage—meaning being able to borrow at rates lower than the cap rate—is challenging for core properties. And you had a very high level of delivery. So, a lot of new supply coming on at the end of 2024, which drove vacancy up and rents down overall in the market.
In 2025, forward-looking, it looks like deliveries are expected to slow. So, some of that supply-demand imbalance may come back into check. But going back to some of the earlier comments, overall, if you’re a buyer of multifamily and you’re looking to push NOI and grow out of this cap rate conundrum, I think you’re going to face some challenges, especially with many expenses rising faster than rents.
We’ve seen insurance rising at a 12% compound annual growth rate over the last 12 years. We’ve seen taxes rise, and that’s putting pressure on the expense side, which will potentially hurt NOI growth for certain companies. And then you see in the Sunbelt—which has long been a darling—many developers showing elevated concentration of underperforming loans, 5,300 properties under a 1x debt service coverage ratio. So, you’re seeing some cracks in those more loved areas of multifamily historically. So, multifamily: complex dynamics in that sector.
On industrial and data centers, I think the dynamics in this sector really go to supply and demand of capital. We’ve seen just a lot of capital flow into industrial and data centers. It’s been a very hot sector for many years, and it’s not only attracting real estate investor capital, unlike sectors like multifamily or office or even retail, which are historically just driven by real estate investors.
The industrial and data center sector has a lot wider investor base. You see infrastructure funds coming in. You see specialized builders. You even see venture capitalists coming in. We just saw today, as we’re making these comments, that SoftBank announced they’re acquiring Digital Bridge, which is a large integrated digital infrastructure player, which also plays in the data center space. So, you have sort of a historically venture-focused source of capital moving into this space.
I think the bottom line for investors for the industrial and data center space is there continues to be a lot of solid demand for more data center space and certain types of industrial. But because there’s so much capital chasing it, I don’t think the forward-looking returns on many of these properties are going to be as high as some people expect them to be.
Given how much we see that in the news, there’s just a lot of capital chasing, and it’s a very capital-intensive build, particularly in the more complex data centers. If you’re thinking about hyperscalers or even more run-of-the-mill data centers, the cost to build these data centers and maintain them are high. So, while the fundamentals are strong and demand is there, the potential upside for your average investor investing in this space, I think, is probably more muted than people expect.
And if people are looking to play the AI trade, I think there’s better opportunities in more traditional software companies rather than playing the data center infrastructure if you’re looking for a higher return profile.
When we look at the commercial real estate market in general, there’s a few ways to approach it from a strategy perspective. There’s core real estate, which has long been the focus of large institutions. It’s where a lot of the institutional open-end funds are focused. There’s development, which is building new properties. And then there’s lending strategies, focused on lending against all the different property types, whether they’re core stabilized properties, value-add, or development.
And what we’ve seen during these last few years is that because of this dynamic of higher interest rates, that core has been very challenged because of the math. We’ve focused on deploying capital both on the lending side, opportunistically, and then on the more heavy value-add to development, where there’s more optionality to deliver upside.
What that means is the play for real estate as just a more boring income substitute is less interesting during this time. I think if you’re looking for that type of exposure, investors should be looking at lending strategies. And then for investors that have a higher risk tolerance and are potentially looking for a higher return profile, there’s a lot more interesting things to do on the development side.
All this being said, you continue to have to be very selective from both a real estate sector and a market perspective because the fundamentals across the United States are just so different. So, I’d say that’s how we’re broadly approaching the market. We continue to be very cautious around core and light value-add strategies, and we’re leaning into selective development strategies for clients with higher risk tolerances that don’t need immediate income, and then opportunistic lending strategies for folks that are looking for a more income-focused return profile.