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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 has been broadly characterized as mixed, with notable strengths in certain sectors offset by growing pressures on others.
John Beuerlein, Chief Economist at Pohlad Companies, noted that heading into 2025, he was concerned that political uncertainty might drag more heavily on economic performance. “The headline numbers have held up, while consumer spending continues to be supportive,” he said. However, he pointed out that the robust consumer activity was primarily driven by higher-income households, while the lower- and middle-income segments struggled with rising prices and a cooling labor market—reflecting corporate caution.
Jonathan O’Kane, Vice President at Chandon Economics, took it further. “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,” he stated.
Looking ahead to 2026, economists expect muted, yet positive economic growth. They do not anticipate a recession but foresee continued challenges for some sectors, especially if job growth weakens or inflation remains elevated. As for the commercial real estate (CRE) market, industry experts are cautiously optimistic.
“There is an overall sense of optimism,” said Ryan Severino, BGO’s Chief Economist and Head of Research. “We’re not out over our skis, but people are feeling better about the sector than they have in years.”
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**Looking Back: Tariffs, Trade, and Interest Rates**
To forecast 2026, one must examine the disruptive dynamics of 2025—most notably tariff policy. April’s “Liberation Day” announcement regarding major U.S. tariff adjustments sent shockwaves through global trade, significantly increasing economic uncertainty.
Greg Willett, Chief Economist at LeaseLock, explained that the frequent revisions to tariff targets weighed on global trade confidence and in turn, disrupted CRE. “Early April’s announcement of major adjustments in U.S. tariff policies disrupted global trade activity, while the constant revision of tariff targets led to a spike in economic uncertainty,” he said.
Moody’s Senior Economist Ermengarde Jabir pointed out that trade tensions raised operating costs across industrial and retail real estate. Consequently, many companies leaned toward downsizing rather than expanding workspace.
Rental housing initially outperformed expectations in early 2025 but cooled in the second half as job creation slowed and immigration fell. “Rent-growth momentum that had emerged in early 2025 reversed in the second half of the year,” said Willett.
High interest rates, driven by persistently sticky inflation, added further pressure. While not historically extreme, rates have been elevated for over two years—higher than levels observed throughout the previous 15 years. Jabir noted this prolonged elevation, coupled with an impending $1 trillion debt maturity wall, continues to worry CRE owners and lenders alike.
As O’Kane put it, “The market spent much of the year assuming rate relief or a growth rebound that never quite 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 pipelines.”
Nevertheless, markets started to adjust to this “new normal” of elevated capital costs. Investment activity began showing signs of life, with some freezing in deals beginning to thaw. “The psychological reset helped what had been a multi-year freeze,” O’Kane added.
Economist Ray Perryman also noted surprising resilience in real estate markets. “Even with all the uncertainty in the economy, overall vacancies held relatively stable for most segments,” he said.
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**2026 Forecast: Soft Landing, Recession, or More of the Same?**
The consensus among economists is that a recession is unlikely in 2026. O’Kane estimated a 40% chance of recession, while Jabir pointed to a 175-basis-point drop in the Effective Federal Funds Rate (EFFR) over the previous 15 months as creating room for business expansion.
Perryman expects GDP growth to approach 2.5% in the second half of the year. Severino also anticipates a pickup in consumption, supported by significant capital flows into data centers.
Beuerlein forecasted continued slow growth, so long as the labor market doesn’t weaken dramatically, leading to what he called a “near-jobless expansion.” Willett’s base case anticipates about 50,000 jobs created per month, enough to hold unemployment steady.
Still, risks remain. A weakening labor market, persistent inflation, or a slowdown in AI sector investment could dampen growth. Beuerlein also flagged immigration limits and an aging population as headwinds. O’Kane added: “Resilience remains the economy’s defining feature, but that resilience shouldn’t be confused with invulnerability.”
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**What’s Next for CRE? A Sector-by-Sector Look**
As the economic environment evolves, so too will the CRE landscape. Here’s what experts have to say about different property sectors:
**Retail: Holding Strong**
Retail’s performance has been quietly positive and is expected to continue as long as consumer spending remains stable.
“Retail quietly had the best returns of the major property types over the last year,” noted Severino. With continued low supply, low vacancy rates are expected to persist.
**Multifamily: Opportunities Ahead**
While deal closings remain difficult, multifamily faces a favorable supply/demand dynamic.
Willett said aging inventory creates opportunities for reinvestment, though affordability remains a major issue. “The premium to buy versus rent has never been higher and expected modest mortgage rate declines won’t dramatically change that,” he said.
**Industrial: Mixed Views**
O’Kane sees industrial as a strong relative performer in 2026 due to long-term trends like near-shoring, logistics demand, and post-trade-war supply chain restructuring.
But Severino countered with caution: “People are falling in love with manufacturing,” he said, “but output, construction of facilities, and related employment are all declining.”
**Office: Slow Recovery**
The office sector remains hampered by hybrid work patterns and oversupply of outdated space. Perryman cited lower demand due to professional services layoffs and uneven performance in key industries.
Still, Severino believes recovery is underway, albeit under the radar. “The office sector is quietly recovering in a way that people probably aren’t paying enough attention to,” he said.
**Capital Markets: Gradual Recovery**
Higher financing costs are limiting development outside niche areas like data centers. Severino anticipates improved pricing and transaction volume, albeit slowly.
O’Kane added that a weaker U.S. dollar could reignite foreign investor interest—especially in coastal metros with liquid markets. Long-term treasury yields are likely to remain elevated, and he expects a cautious uptick in volume and pipeline activity.
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**Key Takeaways for 2026 CRE Strategy**
Jabir emphasized a focus on demographics and long-term utility when evaluating CRE opportunities. She recommended asset types centered on consumer staples, such as grocery-anchored retail.
O’Kane warned against overlooking systemic risks, particularly around U.S. fiscal policy. “Neither political party has shown urgency in addressing the structural deficit,” he said. “CRE is uniquely exposed because long-term rates and global capital flows are central to how our sector functions.”
While an immediate fiscal crisis appears unlikely, elevated borrowing costs and structural deficits could present long-term headwinds.
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In summary, while 2026 may not bring a major economic turnaround, it won’t bring collapse either. The outlook calls for modest growth, cautious optimism, and strategic positioning—particularly within commercial real estate. Resilience remains the keyword, but prudence will be equally necessary.
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