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**The 2026 Economic Outlook: Muted Growth, Cautious Activity—But Likely No Recession**
*The state of the U.S. economy as of late 2025 is best described as mixed.*
“Heading into 2025, I was concerned that the uncertainty around the new administration’s policies would cause more headline slowing in the economy than what we’ve seen,” said John Beuerlein, Chief Economist at Pohlad Companies, the parent company of Northmarq. “The headline numbers have held up, while consumer spending continues to be supportive.”
However, Beuerlein noted that much of the stronger spending has been driven by high-income households. “The lower- and middle-income sectors have become increasingly strained as prices remain elevated and the labor market shows signs of cooling—a reflection of uncertainty at the corporate level,” he added.
Jonathan O’Kane, Vice President at Chandon Economics, echoed this view. “If you strip out the outsized contribution from the highest-income households and the market capitalization gains concentrated in the Magnificent Seven and AI-aligned firms, the underlying economy in 2025 often felt recessionary.”
Looking ahead to 2026, economists suggest a fiscal crash is unlikely, though growth is anticipated to remain subdued. Regarding the commercial real estate (CRE) sector, there is cautious optimism. “We’re not out over our skis, but people are feeling better about the sector than they have in years,” said Ryan Severino, Chief Economist and Head of Research at BGO.
**Looking Back: Trade, Tariffs, and Interest Rates**
Understanding 2026 begins with examining 2025—when tariffs had arguably the largest economic impact. April’s “Liberation Day” announcement of major U.S. tariff policy adjustments sent waves through global trade and sparked economic uncertainty.
“Early April’s tariff revisions led to a spike in economic uncertainty,” commented Greg Willett, Chief Economist at LeaseLock. This, in turn, disrupted commercial real estate sectors. Ermengarde Jabir, Senior Economist at Moody’s, explained that increased operating costs in the industrial and retail sectors were a direct result of these trade disputes. Companies, faced with unpredictability, leaned toward downsizing instead of expansion.
Willett also noted that rental housing demand exceeded expectations in early 2025—only to reverse later in the year as job creation stalled and household formation weakened.
Monetary policy added further challenges. Despite interest rates not being historically high, they remained elevated for over two years, pressuring capital markets. “They’ve been higher over the past two and a half years than they were for the preceding 15 years,” Jabir pointed out. With $1 trillion in CRE debt reaching maturity, owners and lenders faced mounting concerns.
“The market spent much of the year assuming rate relief or a growth rebound that never quite materialized,” O’Kane observed. “The macro backdrop didn’t deteriorate enough to force a crisis, but it remained challenging enough to weigh down valuations, deal flow, and development pipelines.”
Still, markets have slowly adjusted to higher capital costs. Investors began moving off the sidelines, helping thaw what had been a multi-year investment freeze. “Most real estate asset types remained more stable than expected,” said Ray Perryman, founder and CEO of The Perryman Group. “Vacancies held relatively steady across most segments.”
**Looking Ahead: A Soft Landing or Status Quo?**
While no clear consensus exists, economists largely agree that a 2026 recession is unlikely. O’Kane places the likelihood at 40%. According to Jabir, the Federal Funds Rate has dropped 175 basis points over the past 15 months—a move that could support business expansion and more robust employment.
Perryman anticipates GDP growth around 2.5% in 2026, especially in the second half of the year. Severino agrees, suggesting consumption and substantial capital investment in data centers will fuel growth.
Beuerlein forecasted “continued slow growth as long as the labor market does not become substantially weaker,” indicating a “near-jobless expansion.” Willett projects employment growth of around 50,000 jobs per month—just enough to maintain the unemployment rate.
However, growth could falter if the labor market deteriorates, inflation persists, or investor enthusiasm for AI wanes. Beuerlein also noted limiting factors like immigration restrictions and an aging population. O’Kane warned, “Resilience remains the economy’s defining feature, but that shouldn’t be confused for invulnerability. 2026 will hinge on whether the middle class stabilizes—or continues to erode.”
**What’s Next for Commercial Real Estate?**
As the economic outlook shapes decision-making, here’s how the forecast may affect various commercial real estate sectors:
**Retail: Steady Growth**
Retail continues trending positively, so long as consumer spending holds. Low vacancy and limited new supply are supporting the sector. “Retail quietly had the best returns of the major property types over the last year,” said Severino. “That could likely continue—or at least do better than many expect.”
**Multifamily: Opportunities Amid Challenges**
Despite difficulty getting deals to closing, the declining supply of multifamily units creates opportunities. Willett pointed out that older inventory could benefit from capital reinvestment. However, affordability remains a stumbling block. “The premium to buy versus rent has never been higher, and modest rate declines won’t greatly change that equation,” Willett said.
**Industrial: Mixed Sentiment**
O’Kane foresees the industrial sector as a relative outperformer for 2026. With major construction projects completed, supply and demand are realigning. “Structural tailwinds—such as re-shoring, near-shoring, and modern logistics needs—continue to support the sector,” he explained.
Severino, however, was less enthusiastic. “People are enamored with manufacturing as a subset of industrial, but the realities—falling output and employment—contradict the optimism,” he said.
**Office: Slow and Uneven Recovery**
Despite return-to-office mandates, the sector remains challenged. Perryman said that office dislocations will take time to resolve, particularly for older, poorly located properties. The professional services sector—an office tenant mainstay—is also showing inconsistent performance. Yet Severino suggested that office’s recovery might be overlooked. “The office sector is quietly seeing improvement,” he said.
**Capital Markets: Tentative Rebound**
Investment and financing activity is poised to improve, although high input and borrowing costs are restraining development—outside of focused areas like data centers. O’Kane highlighted that a weaker U.S. dollar has revived global investor interest in American real estate—particularly in large coastal markets with straightforward underwriting and lower exit risk.
Structurally higher inflation and growing fiscal deficits suggest elevated Treasury yields may persist, but a “cautious pickup in transaction volume” and improvement in the development pipeline are likely in 2026.
**The Bottom Line for 2026**
Jabir advised those investing or developing in 2026 to focus on asset types and geographies with strong long-term demographic growth. “Also consider long-term use cases supporting consumer staples, including grocery-anchored retail,” she added.
However, O’Kane issued a final warning: the growing U.S. fiscal deficit must not be ignored. “Neither political party has shown urgency in fixing the structural deficit, and markets are starting to discuss the possibility that higher borrowing costs may be a permanent fixture,” he said.
While a fiscal crisis is not immediately expected, he cautioned, “CRE is uniquely exposed because long-term rates and global capital flows are central to how our sector functions.”
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