It’s wise to view the sector as a collection of property types – not as a single asset class.
US commercial real estate (CRE) is expected to deliver stable, income‑led total returns with gradual normalisation in prices after a downturn earlier this decade.
Unlevered US CRE values declined more than 25 per cent from early 2022 to late 2023, according to Green Street, with other major indices showing similar declines. The correction in CRE was unusual in this cycle, as it occurred despite a resilient macro backdrop and strength across broader risk assets, driven primarily by the rapid rise in interest rates.
The upshot, though, is that CRE has already absorbed a meaningful valuation reset, while many other private market asset classes have yet to undergo a similar repricing.
Traditional signals now point towards recovery in the sector. Firstly, public REIT valuations, which typically serve as an early indicator of cyclical shifts, are up more than 40 per cent from a 2023 low. Private valuation indices are now also rising and, thirdly, credit markets are functioning again, supporting higher transaction volumes.
At the same time, distress, a classic lagging indicator, continues to edge higher, reflecting the long tail of the downturn.
What to expect next
A V-shaped recovery in headline valuations remains unlikely given the lack of meaningful stimulus. Instead, returns are expected to normalise gradually. While that may suggest a U-shaped path, widening dispersion in returns across property types and markets points to something closer to a K-shaped recovery.
This unevenness isn’t a flaw in the cycle; it is the cycle. Investors are no longer confronting a broad-based downturn; they are navigating widening dispersion. The cycle ahead will likely be alpha-driven, and real estate investors will increasingly need to take a page from equity markets, where property and market selection drive performance. Structural themes will remain important, but clearing return hurdles requires sharper focus and execution.
Investors must also now confront a new set of uncertainties tied to the Iran conflict and its potential implications for the global economy and risk assets. While it is still early, the risk of escalation, and the associated disruptions to global trade flows, shipping costs, and commodity prices, warrants close monitoring.
US listed REITs continue to demonstrate resilience. Real estate is the 4th best sector of the S&P 500 in 2026 and total returns of 13 per cent year‑to‑date as of February 17, 2026 have pushed valuations above the prior cycle highs reached in 2021, signalling a transition from recovery into expansion. This is important because historical cycle analysis suggests that real estate recoveries average roughly 2 years, while expansions typically last 12-13 years and are long, durable periods supported not only by price appreciation but also by underappreciated income growth.
The current cycle is unfolding in a largely textbook fashion, suggesting it remains early by historical standards. That said, it’s possible, if not likely, that US listed REITs slip back into recovery in the near term, as is typical during early stages of an expansion.
Broad takeaway
The broader takeaway is that earnings visibility and income‑driven total returns are once again being rewarded. This style has been out of favour for several years, but it is beginning to reassert itself in 2026.
Overall, commercial real estate appears to be on a stable footing, and notably, our 2026 outlook has not materially changed. Long‑term lease structures continue to underpin income stability, and fundamentals – outside office and select life sciences segments – remain resilient.
Importantly, our outlook is grounded in the recognition that the global macro environment is unusually complex and disorderly. In such an environment, real estate investors should focus on what they can control: driving net operating income growth. Doing so will require disciplined property, market, and fund selection, particularly as return dispersion across real estate continues to widen in a defining theme for 2026 and beyond.
When you consider CRE not as a single asset class, but instead as a collection of property types that sometimes can behave very differently, the opportunity this cycle becomes clearer. The US listed REIT market is a great example as 15 out of 18 property types are positive for the year – led by data centres (+39.2 per cent) followed by shopping centre (+16.8 per cent) and triple net (+16.3 per cent). Triple net REITs are companies owning properties where tenants are responsible for the “three nets” – property taxes, insurance, and maintenance capital expenditures – in addition to base rent and utilities. These REITs focus on long-term, stable income, typically with 10–20 year lease terms. These structures often provide steady dividends, making them attractive during times of market volatility.
This trend is even more pronounced in the private markets where there’s an opportunity to be even more selective. Office is case in point – in the US 90 per cent of vacancy is concentrated in 30 per cent of buildings and 40 per cent of buildings have no vacancy at all. Our favoured private market sectors in the US are data centres and housing, while we see selective opportunities in industrial and retail.
The appeal for Australian investors
For Australian investors, the appeal of allocating to US commercial real estate lies in both diversification and access to a deeper, more dynamic opportunity set. The US market offers scale, sectoral breadth and liquidity that is difficult to replicate domestically, enabling investors to gain exposure to high-growth segments such as data centres and specialised housing, alongside more defensive income streams.
At a portfolio level, it can provide meaningful diversification benefits, with different economic drivers, tenant bases and lease structures compared to Australian assets, helping to smooth returns across cycles. Importantly, the recent valuation reset has created a more attractive entry point, with income yields and total return prospects improving relative to many other private market assets that have yet to reprice. In an environment defined by dispersion, Australian investors are also well placed to benefit from an alpha-driven approach by accessing specialist managers with on-the-ground expertise.
The bottom line is that a likely alpha driven recovery in US CRE means disciplined asset and market selection matters far more than broad market beta in investment strategies.
By Rich Hill, senior managing director, global head of real estate research and strategy at Principal Asset Management