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**The 2026 Economic Outlook: Muted Growth, Cautious Activity—But Likely No Recession**
The state of the U.S. economy heading into late 2025 and early 2026 is best described as mixed—showing resilience in some areas, while facing increasing stress in others.
“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,” noted John Beuerlein, Chief Economist at Pohlad Companies, parent of Northmarq. “The headline numbers have held up, while consumer spending continues to be supportive.”
However, Beuerlein pointed out that stronger spending has primarily come from higher-income households. “The lower- and middle-income sectors have become increasingly strained as prices remain elevated and the labor market cools—a reflection of corporate-level uncertainty,” he explained.
Jonathan O’Kane, Vice President at Chandon Economics, added, “If you strip out the outsized contribution from the highest-income households and the market capitalization gains concentrated in the ‘Magnificent Seven’ tech stocks and AI-aligned firms, the underlying economy in 2025 often felt recessionary.”
Looking Ahead: No Crash, But Slower Growth
Despite the mixed conditions, economists agree that a fiscal crash is unlikely in 2026. While growth will be slower, commercial real estate (CRE) is expected to benefit from a more optimistic market sentiment.
“There is an overall sense of optimism,” said Ryan Severino, Chief Economist and Head of Research at BGO. “We’re not out over our skis, but people are feeling better about the sector than they have in years.”
Understanding 2025: Tariffs, Trade & Interest Rates
Forecasting 2026 requires analyzing the major economic events of 2025. Economists widely agreed that tariffs were the most disruptive force during the year. April’s sudden and substantial shift in U.S. tariff policy caused significant volatility in global trade and economic uncertainty.
“Early April’s ‘Liberation Day’ announcement of major adjustments to U.S. tariff policies disrupted global trade, while the constant revision of tariff targets led to a spike in economic uncertainty,” explained Greg Willett, Chief Economist at LeaseLock.
These disruptions affected some CRE sectors more than others. Moody’s Senior Economist Ermengarde Jabir said that industrial and retail operators faced higher operating costs as a result of ongoing trade tensions. Companies delayed or reduced expansion plans, opting for downsizing due to fluctuating costs and unpredictable supply chains.
Willett noted that in early 2025, rental housing demand exceeded expectations. However, as job creation began to weaken, household formation declined, particularly among foreign-born renters. “Rent growth momentum that had emerged in early 2025 reversed in the second half of the year,” he said.
Interest rates remained another challenge for CRE. The Federal Reserve maintained a higher Effective Federal Funds Rate (EFFR) for most of 2025. While not historically extreme, rates had remained elevated for over two years, making capital access more difficult.
“The high interest rate environment and the looming $1 trillion debt maturity wall placed ongoing pressure on CRE owners and lenders,” said Jabir.
This combination of trade disruption and monetary tightening kept capital markets sluggish. “The market spent much of the year assuming either rate relief or a growth rebound that never quite materialized,” O’Kane observed.
Still, investors eventually adapted. “The psychological reset helped what had been a multi-year freeze,” said O’Kane, who noted that while investment activity did not fully return, pricing expectations adjusted to the elevated cost of capital.
Ray Perryman, founder and CEO of the Perryman Group, added that real estate remained more stable than expected. “Even with all the uncertainty, overall vacancies held relatively steady for most asset types,” he said.
2026: Slowing, But No Recession?
Most economists do not anticipate a recession in 2026. Jabir estimated the likelihood at 40%, while noting a 175-basis point decline in the EFFR over the past 15 months could support employment growth and encourage business expansion.
Perryman forecast GDP growth at around 2.5% and expected acceleration in the second half of the year. Severino projected growth in consumption and noted that infrastructure investments—especially in data centers—will boost GDP further.
Beuerlein predicted “continued slow growth as long as the labor market doesn’t weaken significantly,” describing the trend as a “near-jobless expansion.” Willett expected employment growth to continue at a rate of about 50,000 jobs per month, just enough to maintain the current unemployment rate.
However, concerns remain. A continued weakening in the labor market, persistent price increases, or a pullback in sectors like AI could undermine optimism. Beuerlein further warned that immigration restrictions and an aging population could limit growth potential.
O’Kane underscored that resilience shouldn’t be mistaken for invincibility. “2026 will depend heavily on whether the middle of the income distribution stabilizes—or continues to erode,” he said.
Sector-by-Sector CRE Outlook
Retail: Steady Momentum
Retail continues to enjoy favorable conditions, thanks to stable vacancy rates and cautious supply growth. “Retail quietly had the best returns of the major property types over the last year,” Severino said. Growth is expected to continue, assuming consumer spending holds.
Multifamily: Investment Opportunity Amid Challenges
Multifamily faces hurdles in closing deals, yet opportunities exist due to aging inventory. Willett believes reinvestment in older assets might be a key play in 2026. However, housing affordability remains a concern. “The premium to buy versus rent has never been higher,” he said, noting that modest declines in mortgage rates likely won’t reverse this trend.
Industrial: Divided Expectations
O’Kane views the industrial sector as a relative outperformer, supported by reshoring, supply chain changes, and logistics demand. “The sector benefits from ongoing structural tailwinds,” he explained.
Severino, meanwhile, offered a more cautious take. “People are falling in love with manufacturing as a subsector, but the metrics don’t support that optimism,” he said, pointing to declines in output and construction.
Office: Contradictory Signals
The office sector remains under pressure despite return-to-office mandates. Perryman noted that poorly located and outdated spaces will continue to struggle, as their tenant industries face uneven performance. However, Severino suggested a quiet recovery is underway. “The office sector is healing in ways that many may not see just yet,” he said.
Capital Markets: Renewed Activity
Capital pricing and deal volumes are expected to slowly recover. Severino indicated that construction activity—outside high-demand niches like data centers—is slowing due to high input and financing costs.
O’Kane added that the weaker U.S. dollar could bring foreign capital back to U.S. CRE, especially in liquid coastal markets. “Expect a cautious pick-up in transaction volume and new development activity, particularly in stabilized locations,” he said.
The Bottom Line
Economists encourage investors and developers to target asset types and geographies with demographic advantages. Jabir advised focusing on long-term needs like food retail and other essential services.
However, fiscal caution is warranted. “Neither political party has shown urgency regarding the deficit,” warned O’Kane. “CRE is uniquely exposed because long-term rates and global capital flows are central to how our sector functions.”
So while a fiscal crisis isn’t on the horizon, sector participants will need to navigate 2026 with strategic caution, realistic expectations—and an eye on shifting macroeconomic forces.
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