Commercial real estate: An opportunity too good to pass up

Commercial real estate (CRE) just experienced its largest price correction since the Global Financial Crisis (GFC). Rising interest rates, market uncertainty and concerns about the office sector all weighed on values, pulling CRE valuations down by nearly 25% from their 2Q22 peak.¹ However, the worst news looks to be behind us. Economic, capital market and fundamental drivers continue trending in a positive direction and CRE total returns have turned positive, signaling the recovery is underway.

A compelling entry point

Real estate is “on sale”

This remains a unique repricing cycle for CRE. Although values have declined by roughly 25% from peak, property net operating income (NOI) is 5.8% higher over the same period² – historically, major valuation declines were also associated with NOI contractions. This dislocation creates a rare opportunity to acquire high-quality CRE assets with elevated cash flows at discounted pricing.

Major CRE repricings are uncommon, with only two other double-digit price corrections occurring in the last 50 years. In each of those last two cycles, once returns turned positive, CRE experienced total return growth that lasted between 13 and 15 years, resulting in a 4–5x equity multiple on invested capital (Exhibit 1). This means that, if history is any indicator, CRE looks well positioned to enjoy a protracted period of strong performance going forward.

Strong relative value

CRE is also one of the few asset classes where pricing remains near its cyclical lows. The S&P 500 is up nearly 85% since CRE values peaked and is trading at historically high price-to-earnings ratios.³ Similarly, the US Aggregate Bond Index has returned ~10% over the same period and going-in yields are well below their cycle highs, suggesting a less attractive entry point than CRE.⁴

This dynamic is highlighted in JPMorgan’s latest release of the Long-Term Capital Markets Assumptions. Over the next 10–15 years, total return assumptions for U.S. value-add real estate (10.1%) and U.S. core real estate (8.2%) rank second and seventh, respectively, out of 58 global asset classes. These elevated returns are made even more compelling by CRE’s high and stable income stream and its low correlation to other asset classes, making it an integral part of a well-diversified portfolio.

An improving environment in 2026 will drive CRE demand

Consumer remains healthy

While the labor market has softened in recent years, a 4.4% unemployment rate⁵ is still very healthy, wage growth remains elevated and Americans continue to spend.

With most people spending what they earn, consumption trends offer insights into the state of the consumer, and our proprietary Chase card data gives us timely visibility into spending patterns. This real-time data can be volatile, but as of early January spending continues to grow at a healthy pace that is well within the range we have seen over the last few years (Exhibit 2). That said, spending growth is most concentrated among the highest-earning Americans, while lower-income individuals have seen a more significant slowdown – the often-touted “K-shaped economy,” which is showing up in our Chase data as well. Like most economists, we assign a low probability to an economic recession in 2026, so we expect consumer strength to persist – even if “K-shaped.”

Easing monetary policy should drive economic growth and CRE pricing

For the last few years, CRE was operating in an environment where the cost of debt exceeded cap rates. This is unusual, as typically investors expect equity to deliver higher yields as compensation for greater risk, while debt provides lower but steadier income. The Fed’s pivot toward rate cuts is normalizing this dynamic. The 175bps of cuts through December brought all-in borrowing costs back in line with cap rates (Exhibit 3). Additional rate cuts in 2026 or even tighter credit spreads could bring borrowing rates below cap rates again. This normalizing of the capital structure will make debt more accreditive and increase expected equity returns. Further, liquidity should improve as equity yields become increasingly attractive relative to debt.

In addition to this, the rate cuts should also help stimulate the economy. Unlike previous cycles, the Fed is cutting interest rates before employment and economic growth turn negative. This proactive stance should accelerate labor and economic growth, supporting CRE demand across all sectors.

Government stimulus will further support growth

Programs such as the CHIPS Act and Inflation Reduction Act have already catalyzed significant private investment in national infrastructure and supply chain onshoring, boosting economic growth and manufacturing demand. In addition, the first wave of stimulus from the One Big Beautiful Bill Act will start taking effect in early 2026 and should incentivize further private capital investments, such as JPMorgan’s $1.5 trillion “Security and Resiliency Initiative.” This additional stimulus and follow-on spending are expected to add 1% to GDP growth in 2026, boosting not only economic prospects but also demand across multiple CRE sectors.

Supply is falling and expected to remain muted

In addition to growing demand, the supply story continues to improve as well. After seeing record construction over the last few years, the pipeline is now fading. Construction starts are down by at least 60% across every major sector, and with elevated construction costs weighing on the profitability of new development projects, supply should remain subdued for some time (Exhibit 4).

The office sector is turning the corner

Long considered the most challenged area of CRE, the office sector is transitioning into a recovery. Most major companies are calling employees back to the office, boosting tenant demand and sector performance. As a result, office total returns turned positive again in 2025, making the sector a net contributor to CRE returns for the first time in three years.⁶

Conclusion: A rare opportunity to buy near the trough

With CRE valuations still near cyclical lows, investors have a unique entry point into an asset class with a favorable outlook, elevated yields and low correlations to equities and bonds. Additionally, with interest rates falling and more government stimulus on the way, the economic, capital market and fundamental backdrop continues to improve, setting the stage for persistent gains.

Although we expect a prolonged recovery, those who act now are best positioned to benefit from what could be a near-term surge in pricing, making this a generational opportunity to invest in CRE.

¹National Council of Real Estate Investment Fiduciaries (NCREIF). Market calculations based NCREIF – Open End Diversified Core Equity (ODCE) Fund Index. Data as of September 30, 2025. NCREIF NFI-ODCE Index data reflects the returns of a blended portfolio of institutional quality real estate and does not reflect the impact of management and advisory fees. The NFI-ODCE Index has material differences from an investment in public, non-listed REITs, including those related to investment objectives, risks, fees and expenses, liquidity and tax treatment. The NFI-ODCE Index is not a measure of non-listed REIT performance. It is not possible to invest directly into an index.

²NCREIF, ODCE Fund Index; net operating income growth of all properties held by funds within the index from 3Q25 to 3Q25. Data as of September 30, 2025.

³Bloomberg, FactSet, Standard & Poor's Total Return Index. Data as of September 30, 2025.

⁴Bloomberg US Aggregate Total Return Index. Data as of September 30, 2025.

⁵Bureau of Labor Statics; data as of November 2025.

⁶NCRIEF, ODCE Fund Index; office sector total return. Data as of September 30, 2025.

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