The Federal Reserve has shifted to monetary easing, lowering rates and ending quantitative tightening, responding to rising concerns about labor market weakness. The Fed’s pivot marks a turning point—policy is now playing defense against economic fragility.
Economic growth is uneven, with AI-related sectors are booming, but many states—especially those reliant on agriculture and manufacturing—at or near recession. It’s a tale of two economies: tech is soaring while traditional sectors struggle. Negative net migration and restrictive immigration policy are projected to dampen long-term growth in population, labor force, and property demand, particularly in markets with large foreign-born populations. Despite these headwinds, the base case outlook remains for slow growth rather than a broad recession, with property returns expected to remain competitive relative to equities and fixed income. Real estate is still holding its own in a world of muted growth.
Against this backdrop, the U.S. commercial property market has entered a new value reflation cycle, delivering positive total returns for five consecutive quarters, primarily from income rather than appreciation. While property values have begun to recover since late 2024, gains remain modest and are expected to stay limited through 2026. This restrained outlook is shaped by only moderate growth in net operating income (NOI) and stable property yields, with average appraisal cap rates at historically low spreads to Treasury yields. As a result, significant near-term yield compression and rapid appreciation are unlikely.
Transaction volumes have rebounded strongly, with year-to-date activity up over 15% from 2024. All major property sectors except hotels are outpacing last year, and seniors housing with nearly double the prior year’s volume, is the breakout star—small base, big momentum. Office and retail sectors have seen notable increases in transaction activity, but office properties, despite offering higher initial yields, face questions about income durability and future capital expenditure needs as leases roll.
Looking ahead, the story for 2026 is normalization—not boom, not bust. Institutional investor surveys cluster return expectations for most property sectors between 7.0% and 7.5%, with seniors housing at the upper end and office at the lower. Capital flows into real estate are expected to accelerate as institutional allocations lag targets, especially with rising equity market valuations. This should support continued growth in transaction volume and a gradual normalization of property yields.
For more information, please contact:
MICHAEL ACTON, CFA®
Managing Director, Head of Research & Strategy, North America
michael.acton@aew.com
+1.617.261.9577
JAY STRUZZIERY, CFA®
Head of Investor Relations
jay.struzziery@aew.com
+1.617.261.9326
This material is intended for information purposes only and does not constitute investment advice or a recommendation. The information and opinions contained in the material have been compiled or arrived at based upon information obtained from sources believed to be reliable, but we do not guarantee its accuracy, completeness or fairness. Opinions expressed reflect prevailing market conditions and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW. There is no assurance that any prediction, projection or forecast will be realized.
