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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 can be best described as mixed.
“Heading into 2025, I was concerned that uncertainty around the new administration’s policies would result in more visible economic slowing 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 this spending has largely been driven by high-income households, while middle- and lower-income groups have faced growing strain due to persistent inflation and a cooling labor market—an outcome of increasing corporate caution.
Echoing this sentiment, Jonathan O’Kane, Vice President at Chandon Economics, said, “If you strip out the outsized contribution from the highest-income households and the market capitalization gains concentrated in the ‘Magnificent Seven’ mega-cap tech and AI firms, the underlying economy in 2025 often felt recessionary.”
Looking toward 2026, economists suggest that while a full-blown downturn seems unlikely, the pace of economic growth will remain slow. The commercial real estate (CRE) community, meanwhile, is feeling more optimistic than it has in years. “We’re not out over our skis, but people are feeling better about the sector than they have in a while,” said Ryan Severino, Chief Economist and Head of Research at BGO.
**Key 2025 Influencers: Tariffs and Interest Rates**
To understand 2026’s economic trajectory, it’s essential to consider what shaped 2025. Economists point to tariffs as having the greatest impact.
“April’s ‘Liberation Day’ pivot in U.S. tariff policy disrupted the global trade landscape, with constantly shifting tariff targets injecting significant economic uncertainty,” said Greg Willett, Chief Economist at LeaseLock.
This volatility strained various sectors within CRE. Moody’s Senior Economist Ermengarde Jabir explained that increased trade-related costs added pressure to both the industrial and retail sectors. Companies opted to reduce space rather than expand due to market unpredictability.
Still, there were bright spots. “Rental housing demand exceeded expectations during the first half of the year,” Willett noted. But as job creation slowed, household formation declined and foreign-born renters exited the market. “The rent-growth momentum seen in early 2025 reversed by the second half of the year,” he added.
Persistent inflation also affected the Federal Reserve’s monetary stance, keeping the Effective Federal Funds Rate (EFFR) elevated. Despite not being historically high, these rates were significantly higher than those observed in the past 15 years, Jabir pointed out. The combination of high borrowing costs and a looming $1 trillion debt maturity wall put additional pressure on CRE owners and lenders.
O’Kane noted that the broader market “spent much of the year anticipating rate relief or a growth rebound that never materialized. The macro backdrop didn’t deteriorate enough to force a crisis, but it remained challenging enough to weigh down valuations, deal flow and development pipeline activity.”
Still, investment sentiment slowly improved. “While transactional activity didn’t fully rebound, the psychological reset helped thaw what had been a multi-year market freeze,” said O’Kane.
Ray Perryman, founder and CEO of The Perryman Group, highlighted the resiliency of real estate assets despite ongoing economic volatility. “Even with all the uncertainty, overall vacancies held relatively stable across most categories,” he said.
**2026 Forecast: Soft Landing, Mild Growth, and Resilient CRE**
Economists agree that a recession in 2026 remains unlikely. O’Kane puts the odds of a recession at 40%. Jabir added that since the Fed began easing monetary policy, the EFFR has fallen by 175 basis points—an adjustment that could foster business stability and job retention.
Perryman anticipates an acceleration in economic activity in the latter half of 2026, forecasting GDP growth around 2.5%. Severino concurs, citing increased consumption and significant capital flows into data centers.
Beuerlein expects “continued slow growth,” contingent on a stable labor market and what he calls a “near-jobless expansion.” Willett predicts job creation will average about 50,000 per month, a pace sufficient to maintain steady unemployment.
Still, vulnerabilities remain. A deteriorating job market, rising prices, or slowing AI investment could challenge recovery. “Immigration restrictions and an aging population will also serve as headwinds to growth,” Beuerlein warned.
While resilience remains the hallmark of the current economy, O’Kane concluded that it “shouldn’t be confused for invulnerability. 2026 will hinge significantly on whether the financial pressures on middle-income groups ease or deepen.”
**What This Means for CRE Sectors**
The economic tempo will directly affect CRE, shaping performance across its major sectors:
**Retail: Holding Steady**
Retail appears stable, with strong consumer demand supporting the sector. “Despite low supply, vacancy rates remain subdued,” said Severino. “Retail quietly posted the best returns among the major property types last year, and that trend could continue.”
**Multifamily: Emerging Opportunities**
Although closing multifamily deals remains difficult, Willett believes there’s opportunity as supply moderates and aging inventory invites reinvestment. He warned, however, that affordability remains a pressing issue. “The cost disparity between renting and owning is at a record high, and projected declines in mortgage rates won’t sufficiently narrow that gap.”
**Industrial: Mixed Signals**
O’Kane views industrial as a likely outperformer in 2026. With the bulk of pandemic-era construction now complete, demand and supply are better aligned. “Long-term trends like reshoring and supply chain realignment continue to favor industrial space,” he said.
But Severino expressed caution. “Interest is growing around industrial manufacturing, but the data tells a different story—output, construction, and employment are all trending downward.”
**Office: Challenges Persist**
The office segment remains under pressure, despite some return-to-office mandates. Perryman stated that poorly located or outdated space is struggling, compounded by uneven performance in the business services sector. Yet Severino sees signs of cautious recovery: “Office is quietly healing in ways that are not getting enough attention.”
**Capital Markets: Cautious Optimism**
According to Severino, improved pricing and deal volume are expected in capital markets. Still, recent development activity is limited, largely constrained by cost pressures.
O’Kane added that a weakening U.S. dollar could reignite interest from foreign investors—especially in liquidity-rich coastal markets. However, he warned that persistent structural deficits and sticky inflation keep long-term Treasury yields high. He expects a “cautious pick-up in transaction volume” alongside renewed development activity.
**The Final Takeaway**
For CRE stakeholders, 2026 is all about smart investment strategy. Jabir recommends focusing on asset types and locations offering long-term demographic growth, particularly properties tied to essential services like grocery-anchored retail.
Yet O’Kane advised continued vigilance. “The structural deficit remains unaddressed, and there’s growing concern that elevated borrowing costs could be here to stay,” he said. While no fiscal crisis appears imminent, “CRE is particularly sensitive to long-term interest rates and global capital flows. That exposure makes our industry more vulnerable as the macroeconomic outlook evolves.”
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