CRE sector offers targeted opportunities, but broad-based expansion unlikely in 2026: BBG

The chances of a broad-based U.S. commercial real estate recovery during the second half of this year may be fading due to persistent inflation, high interest rates and ongoing geopolitical uncertainty, according to the mid-year CRE outlook from BBG Real Estate Services.

A leading commercial real estate valuation and assessment firm, BBG writes that heightened tensions in the Middle East are creating volatility in energy supplies and prices. This, in turn, is reinforcing inflation worries and creating additional uncertainties for global financial markets.

However, despite this challenging scenario, the U.S. economy remains resilient, and financing is available for well-positioned assets. BBG contends that capital has returned to commercial real estate, but it is only available for properties with the right fundamentals, such as durable cash flow, operational stability and manageable leverage.

While the U.S. economy has remained stable, inflation continues to be a leading concern. Treasury yields remain elevated, suggesting that interest rates will stay higher for longer.

BBG finds that underwriting standards continue to narrow and higher borrowing costs are pressuring returns. But investors are selectively deploying capital for the right deals in the right circumstances. Refinancing is also taking place, as the market works through loan modifications, recapitalizations and selective pricing.

Among specific segments of the market, BBG finds the industrial sector to be healthy. Leasing activity is slowing to a more normal pace after experiencing a major growth streak in recent years. Markets also are beginning to balance out as the development pipeline slows. Investors remain positive to the sector, but underwriting assumptions are becoming more conservative.

Surprisingly, retail has emerged as one of commercial real estate’s strongest-performing sectors, according to the report. Limited new construction, disciplined retailer expansion and strong consumer spending have helped improve fundamentals for shopping centers anchored by grocery stores and other strong retailers. Vacancy rates remain relatively low, but regional malls continue to face difficulties.

The multifamily sector has grown considerably in recent years but now must adjust to a changing environment. New deliveries in many Sun Belt markets are easing occupancy issues and putting pressure on rent growth. BBG writes that at the same time, elevated financing costs have created challenges for assets financed with floating-rate debt or aggressive leverage.

Still, even with the current challenges, long-term demographic trends and the high cost of housing bode well for the multifamily sector’s future.

The office sector continues to be commercial real estate’s most bifurcated segment, according to BBG. High-quality properties in coveted locations are attracting tenants, while lower-quality office properties in less attractive locations continue to struggle. However, leasing activity, tenant retention and capital expenditures vary from one property to another, making sector generalizations unreliable.

Investors may find greater success by focusing on alternative property types, such as data centers and senior housing, BBG suggests. Data centers are among the hottest commercial asset classes in the country right now, and senior housing fundamentals also remain strong as the population continues to age and there is limited new development coming to market.