The state of commercial real estate

US COMMERCIAL REAL ESTATE has undergone a prolonged valuation reset following tighter financial conditions and higher interest rates. Prices are down 18% peak to trough, but the recovery landscape is deeply uneven across sectors. Industrial has held up, office has been hit hardest, and niche sectors have diverged sharply from the aggregate. Critically, we believe all segments of the CRE market remain in transition and current conditions do not call for a broad asset class view. Instead, we suggest selectivity by sector, asset, quality, and capital structure. For private CRE debt investors, this is an environment where entry basis, structure, underwriting, and sponsor alignment do the work that broad market beta will not.

In this piece, we trace how inflation, higher-for-longer rates, and demographic shifts are reshaping CRE, show how those forces have helped produce an uneven price recovery across property types, and explore case studies where these threads converge.

A macro regime of persistent inflation risk and higher-for-longer rates

Today’s macro backdrop is a key driver of the dispersion and volatility permeating the CRE landscape. Inflation dynamics are increasingly shaped by geopolitics, energy prices, and supply-side shocks rather than solely on cyclical demand. Numerous world conflicts, including the Iran conflict (which also spills over into lower growth) has reinforced this pattern. We expect the Fed to continue to be guided by core inflation while living with headline inflation. In our view, the possibility for bond yields to rise somewhat further exists, but the longer an oil spike stays in place, the more the market will rotate from inflation concerns to growth concerns. That rotation matters more for real estate credit than the direction of any single rate move because it determines whether stress first shows up in debt service coverage or in occupancy (demand), and thus cash flow.

Bond yields have normalized back into their long-term historical range, shown in Figure 1 by the band between the two horizontal lines. That range excludes both the stagflation era, when yields moved well above it, and the post-crisis deflationary era, when yields fell well below it. We believe this range is likely to hold only in the absence of sustained supply-driven inflation. In addition, a Fed that remains focused on balance sheet reduction could decrease duration support at the long end and place upward pressure on yields even if policy rates drift lower.

Overall, shifts in long-term inflation expectations are the key catalyst to watch. Should they remain anchored, opportunities in CRE credit could open up even while near-term inflation prints higher. Should they de-anchor, duration-biased assets could reprice further, and the refinancing window could narrow.

A meaningful demographic headwind, with asset-level implications

Alongside those inflation and rate dynamics, demographics are an additional structural force acting on CRE, and they are reshaping demand in ways that will matter at the asset level for years. US population growth has slowed sharply as immigration has stalled. Based on current Congressional Budget Office (CBO) and Census projections, population growth will halve again within the next decade; by 2030, it will turn negative without positive net immigration. This is a genuine headwind to rent growth for sectors that rely on the natural expansion of the economy. The headwind weighs most heavily on property types where demand is broadly tied to population flows rather than to specific cohort dynamics. Advances in AI are raising the prospect of productivity gains that could offset some of the aggregate drag on growth, though productivity does not translate cleanly into occupancy growth at the property level.

That said, slower population growth does not negate the underlying housing demand that comes from household formation, migration patterns, and changing living arrangements. However, it does raise the bar for selectivity on location and asset quality. The same demographic trend that softens a weak submarket can tighten a strong one.

Case study: Senior and student housing

The demographic picture is also highly uneven by cohort (Figure 2), with meaningful implications for niche sectors. In 2026, the first baby boomers turn 80, driving a pronounced acceleration in the 80-plus population that extends through the middle of the next decade,² supporting senior housing and health care. In contrast, college enrollment peaked more than a decade ago³ and has stabilized at a lower plateau, and recent immigration restrictions create a tougher backdrop for university housing.

In senior housing, we believe there are attractive risk-adjusted opportunities in lower-service categories such as active adult and age-restricted housing. These formats operate more like traditional multifamily and are easier to underwrite, while still benefiting from demographic tailwinds. We are more cautious on higher-acuity segments such as skilled nursing, where success depends not only on strong operating expertise but also on scaled platforms that can better manage labor intensity, procurement, reimbursement complexity, and margin pressure. As a result, underwriting risk is materially higher in those segments.

In student housing, the sector-level story is more mixed but specific assets can be highly attractive. The headwinds drive focus on public universities, top in-state schools, and institutions with strong research programs, well-regarded athletic programs, and deep student affinity. Proximity and easy, safe campus access remain important; however, students and families are becoming increasingly budget-focused and more willing to accept some location inconvenience in exchange for lower rents. Opportunities are particularly attractive where on-campus housing is insufficient, creating a structural supply-demand imbalance that is unlikely to resolve through new university development.

In both senior and student housing, the lesson is the same: Durable demand exists, but generalized sector exposure is the wrong way to capture it.

The uneven repricing: Where dispersion creates opportunity

These structural forces together help explain why the CRE price recovery has been so uneven across property types. Aggregate CRE prices have begun growing again but remain below inflation, meaning real values are still adjusting lower. Beneath the aggregate, dispersion across sectors is extreme (Figure 3). Industrial has been supported by the continued rise in e-commerce share, though overbuild concerns in warehouses have tempered recent growth. Niche areas like storage have led to that divergence on the upside. Retail and multifamily have been more volatile but are approaching flat on a year-over-year basis. Office prices have faced the steepest decline of any sector, with year-over-year readings falling below negative 30% at the trough before stabilizing.

We believe this combination of dispersion and reset valuations is precisely the environment where private credit has the most potential. Though equity recovery remains patchy, well-structured senior loans with covenant protections and disciplined entry bases do not require equity price appreciation to deliver the return profile investors seek.

Going forward, we believe the most compelling private credit opportunities are in industrial and multifamily, though for somewhat different reasons. Industrial continues to benefit from resilient fundamentals and a relatively favorable forward supply backdrop. Multifamily also remains attractive, in our view, but requires more patience as post-pandemic supply is absorbed and rent growth normalizes. Office, by contrast, remains the most visible adjustment story and among the most idiosyncratic. The vacancy rate now sits at roughly 21%,⁴ the most brutal adjustment this sector has faced. Remote work appears to be a permanent feature of demand, and space reductions at renewal are now common. Some markets are showing signs of stabilization as buildings are repurposed and return-to-office patterns settle, but prices and rents continue to absorb the bulk of the adjustment. For lenders, office is a selectivity-within-selectivity opportunity: specific assets in resilient markets with select tenant profiles can still be underwritten, but the sector cannot be underwritten (or for that matter disregarded) as a whole.

Case study: Multifamily (apartments)

Though industrial benefits from clear market tailwinds and remains one of our preferred sectors in private credit today, multifamily is where the dispersion, demographic, and supply dynamics across CRE are most visible — and where the critical role of underwriting is most evident.

The apartment sector illustrates how demand softness from slower population growth intersects with a post-pandemic supply overhang. Vacancy rates have climbed steadily as recent completions have been absorbed, and year-over-year absorption still falls short of completions in most market-size cohorts. Rent growth has been soft, with several months of negative month-over-month readings during 2025. We believe vacancies are stabilizing but remain elevated, and rent growth is unlikely to reaccelerate meaningfully until the supply overhang clears. Softer rents are already showing up as a bright spot in inflation reports, as higher vacancies pull shelter CPI lower.

However, the setup is not uniformly bearish, in our view. Construction starts have already corrected sharply, which will pull completions lower through 2026 and 2027. The weak forward pipeline means that any demand rebound will be absorbed by existing stock rather than new deliveries. Recent construction cost escalation may further constrain new supply, particularly for developers without preferred access to materials, labor, or balance sheet flexibility. Moreover, shelter demand remains structurally pent up as the share of 25-to-34-year-olds living with their parents sits near multi-decade highs (Figure 4). If affordability improves, household formation could recover quickly.

Supply discipline and a reopening capital stack

The supply correction is not confined to multifamily. Nonresidential construction starts have declined for more than three years, with a cumulative drop of roughly 37%.⁵ The magnitude is comparable to the 2001 to 2003 adjustment, about half the drawdown that preceded the 1990 recession, and well short of the post-GFC contraction. Two near-term policy catalysts bracket the pipeline. The Infrastructure Investment and Jobs Act expires in September 2026 with possible bipartisan renewal in a lame-duck session. Separately, the 100% depreciation under the One Big Beautiful Bill Act could pull nonresidential activity forward into 2027.

Warehouses and manufacturing have led the recent decline, the latter normalizing after the chip-factory-driven boost. Data centers remain an offset to the broader weakness, though we note that private credit exposure to data centers carries real capital-structure and terminal-value considerations that should not be conflated with the demand story.

Lending conditions are improving as bank lending standards to CRE have shifted from tightening to easing (Figure 5), and demand for CRE loans has stabilized after several quarters of contraction. Importantly, traditional bank lenders never fully retrenched from the space. Instead, they simply moved up in the capital stack and also increasingly provide warehouses and senior-secured facilities to private credit managers, giving them indirect CRE exposure. Small- and mid-sized banks continue to work through maturing loans in some of the more troubled segments, but this activity is concentrated in middle-market lending.

Bottom line on the state of commercial real estate

Commercial real estate is in perpetual transition, and we believe it is critical to have deep macro and micro expertise to navigate the resulting dispersion. The macro environment will shape the range of equity outcomes, even for good assets in strong locations. In private credit, we believe downside protection comes from conservative lending, disciplined execution of business plans, strong asset underwriting, and sponsor alignment more than from broad directional calls on rates or sectors.

¹Source: Federal Reserve Board. Data as of 31 May 2026. | ²Sources: CBO, Census Bureau. Data as of 09 April 2026. | ³Source: Department of Education. Data as of 28 February 2026. | ⁴Source: Reis, Inc. | Data as of 31 December 2023. | ⁵Sources: Dodge Construction Network, Wellington Management. | Data as of 30 April 2026.