By Bill Grubbs, CIO at Realberry
As we move through 2026, the commercial real estate market continues to transition into a new cycle that will be driven more by focused execution and fundamentals rather than capital markets characterized by continually declining interest rates. The sudden and dramatic increase in interest rates in 2022/2023 was a huge shock to the system. The market took several quarters to accept and recognize the needed downward reset in valuations. That prerequisite has now laid the groundwork for the market to move forward, slowly, in recovery. This is the fourth downcycle of my career, and, as with all market cycles, it has been both unique and challenging, and as it always has, it will get back to more robust times.
There is material uncertainty and mixed signals; however, from a macroeconomic standpoint, the U.S. economy continues to demonstrate resilience. Economic activity has been supported by consumer spending and healthy corporate balance sheets and profits. However, job growth has moderated, and the benefits of economic expansion have been unevenly distributed. Higher-income households remain on relatively solid footing, while affordability pressures persist elsewhere. This “K-shaped” dynamic has meaningful implications for real estate demand, especially across housing, retail and service-oriented property types. It is also worth noting that the impacts of the war in Iran materially raise the level of uncertainty.
Interest rates remain a dominant influence. Short-term rates have eased somewhat from prior highs, while longer-term benchmark rates have remained relatively stable in the fours. For real estate investors, these longer-term rates matter more, underpinning valuation, capital structures and underwriting discipline. Expectations around rates and pricing appear more grounded today than in prior periods.
From a valuation perspective, the most acute phase of price correction is largely behind us in certain markets. Real estate values reached a low point in early 2024, with a modest and uneven recovery since. While there is a broad range of price declines depending on property type and asset specifics, many assets we evaluate appear to be trading meaningfully below replacement cost. Construction costs remain materially higher than pre-COVID levels, reinforcing the relative appeal of existing, well-located properties.
This backdrop has led us to view the current environment as one of the more compelling entry points in recent years for certain strategies and asset categories. That said, this is more about relative opportunity than absolute value. Real estate does not necessarily appear “cheap” by historical standards. Instead, the opportunity lies in clearer pricing, improved income visibility and the ability to focus on assets where prospective returns are supported by fundamentals rather than shifts in interest rates or valuation multiples.
Looking ahead, returns in this cycle are likely to be driven by net operating income growth and durable cash flow. The prior cycle rewarded leverage, rapid appreciation and declining interest rates. In contrast, the current environment places greater emphasis on asset quality, market selection, operational execution and patience. While this may result in a less dramatic return profile, it should support more durable outcomes over time.
Capital markets reflect this transition. Debt capital has largely returned for certain asset classes, with lenders re-engaging and underwriting standards becoming more consistent. Equity remains available, but selective. Many investors continue to navigate liquidity constraints stemming from limited distributions from existing funds, often influenced by delayed valuation recognition. As pricing clarity improves and transaction activity continues to normalize, capital flows into real estate may strengthen gradually, though likely without the urgency seen in earlier cycles.
In general, transaction volumes remain below prior peaks but are showing some signs of stabilization. Buyers and sellers are increasingly finding common ground as market values become more clearly established. This process of price discovery, while gradual, is an important step toward a healthier and more functional market.
Within this framework, asset and market selection have taken on heightened importance. The dispersion of outcomes between property types, geographies and individual assets will likely be wider than in past cycles. Multifamily and industrial properties continue to represent the deepest and most liquid segments of the institutional market. Within residential, for-rent housing formats, including build-to-rent, seem to be attracting increased attention due to demographic trends, affordability considerations, evolving lifestyle preferences and other factors.
Retail has re-emerged as a sector of strong interest following years of limited new supply and steady consumer demand, as well as retailers learning they need both physical stores and an online presence. In markets where fundamentals support it, well-located retail properties appear capable of attracting capital, inclusive of selective development.
The office and hospitality landscapes remain more complex. While each may have reached a valuation floor, recovery may be uneven. In office, a subset of high-quality, well-located assets appears positioned to perform, while the majority of assets still face structural challenges in demand and functionality. Hospitality presents strong, but selective opportunities in the luxury and lifestyle segments and in assets acquired below replacement cost, though managing operating expenses remains a key strategy.
Alternative property types, including medical office, student housing, manufactured housing, industrial outdoor storage and data centers, continue to exhibit attractive demand characteristics, albeit with varying risk profiles and capital requirements.
My outlook for real estate in the remainder of 2026 is cautiously constructive. The market has absorbed a meaningful reset, pricing has adjusted and capital markets appear to be stabilizing in certain segments. The path forward is unlikely to be defined by rapid appreciation or broad-based tailwinds, but rather by disciplined investment, thoughtful underwriting and a focus on assets supported by enduring demand. This kind of environment rewards experience, selectivity and a long-term perspective.
The views expressed are subject to change and are based on current market conditions. This material is for informational purposes only and should not be construed as investment advice or a recommendation. Any offer or sale of securities will be made only through definitive offering materials, which contain critical information and risk factors. Certain statements may be forward-looking and involve risks and uncertainties, and actual results may differ. Investments in private offerings are speculative, illiquid, and may result in a complete loss of capital. Past performance is not indicative of future results. Prospective investors must conduct their own due diligence and are encouraged to consult with their own financial advisor, attorney, accountant, and any other professional that can help them understand and assess the risks associated with any investment opportunity. Securities offered through North Capital Private Securities, member FINRA/SIPC.
