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**The 2026 Economic Outlook: Muted Growth, Cautious Activity—but Likely No Recession**
*Economic Overview: A Mixed Bag in Late 2025*
As 2025 draws to a close, the U.S. economy is showing signs of both resilience and strain. John Beuerlein, Chief Economist at Pohlad Companies, noted that while there were initial concerns that the new presidential administration’s policy uncertainties could slow the economy, consumer spending helped hold headline numbers steady.
However, Beuerlein emphasized that this spending largely came 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 uncertainty at the corporate level,” he said.
Jonathan O’Kane, Vice President at Chandon Economics, reinforced this observation. “If you strip out the outsized contribution from the highest-income households and the gains from mega-tech and AI-aligned companies, the underlying economy in 2025 often felt recessionary.”
Despite this, economists are not forecasting a fiscal crash in 2026. Growth may be slow, but the overall sentiment, particularly for commercial real estate (CRE), is optimistic. Ryan Severino, Chief Economist and Head of Research at BGO, described the sentiment stating, “We’re not out over our skis, but people are feeling better about the sector than they have in years.”
**Key Influences of 2025: Trade, Tariffs, and Interest Rates**
Looking back, economists widely agree that U.S. tariff policy had a significant impact on the economy in 2025. Greg Willett, Chief Economist at LeaseLock, cited the “Liberation Day” announcement in early April, where the U.S. made major tariff adjustments, disrupting global trade and introducing economic uncertainty. That uncertainty trickled down into commercial real estate.
Ermengarde Jabir, Senior Economist at Moody’s, noted that tariff whiplash increased operating costs in the industrial and retail sectors while creating ambiguity in space utilization decisions.
Rental housing demand exceeded expectations in early 2025. However, as job creation slowed and foreign-born renters exited the market, rent-growth momentum reversed later in the year, according to Willett.
Meanwhile, the Federal Reserve’s elevated Effective Federal Funds Rate (EFFR) remained a persistent drag on capital markets. While not high by historical standards, interest rates stayed above levels seen over the previous 15 years. Jabir indicated that this, combined with a looming $1 trillion in commercial debt maturities, kept pressure on CRE owners and lenders.
O’Kane summarized the year by explaining that markets anticipated interest rate relief or a growth rebound—neither of which materialized—resulting in diminished valuations, slow deal flow, and constrained development pipelines. Nevertheless, markets adjusted, and investor sentiment began to warm, with transaction activity picking up slightly.
Ray Perryman, founder and CEO of The Perryman Group, observed that, despite economic instability, most real estate asset classes showed unexpected resilience, with overall vacancy rates staying relatively stable.
**2026 Forecast: Soft Landing or Status Quo?**
The consensus among analysts is that the odds of a 2026 recession remain relatively low. O’Kane estimated the recession risk at 40%, while Jabir pointed to a 175-basis-point drop in the EFFR since monetary easing began over 15 months ago—enough to encourage business investment and employment retention.
Perryman expects GDP growth of about 2.5% in the second half of the year. Severino highlighted consumption expansion and capital flows into data centers as contributors to upcoming growth.
Beuerlein predicted a continuation of slow growth, sustained as long as the labor market maintains its current level. Willett added that employment growth would likely hover around 50,000 new jobs per month—sufficient to stabilize the unemployment rate.
Still, potential risks abound. If labor market conditions worsen or equity markets—particularly in sectors like AI—lose momentum, optimism could fade. Beuerlein warned that immigration restrictions and an aging population are further structural limits to long-term economic expansion.
O’Kane summed up the economic backdrop: “Resilience remains the economy’s defining feature, but that resilience shouldn’t be confused for invulnerability. 2026 will hinge on whether the middle-income segment stabilizes—or continues to erode.”
**What This Means for Commercial Real Estate**
Given the economic outlook, here’s how various CRE sectors are positioned for 2026:
**Retail: Steady as Consumer Spending Holds**
Retail remains a bright spot. As long as consumer activity continues, Severino expects low vacancy rates due to limited supply. “Retail quietly had the best returns of the major property types over the last year,” he said, predicting continued strength or even better-than-expected performance.
**Multifamily: Opportunity Amid Constraints**
Though deal flow is slow, the multifamily sector offers opportunity. Willett noted that much of today’s apartment inventory is aging, creating an opening for reinvestment. Affordability challenges continue, however. “The premium to buy versus rent has never been higher,” Willett said, adding that modest interest rate declines likely won’t alter that balance much.
**Industrial: Mixed Signals**
O’Kane remains optimistic about industrial in 2026, due to persistent tailwinds such as reshoring, supply chain restructuring, and e-commerce logistics needs. Nevertheless, Severino warned that enthusiasm around manufacturing may be unwarranted given declining output, construction, and employment in the sector.
**Office: Gradual Recovery Underway**
Despite return-to-office policies, the office sector continues to face challenges. Perryman mentioned lingering dislocation, particularly for older or poorly located properties, as well as industry layoffs dampening demand. Yet Severino offered a more bullish view, suggesting a quiet recovery is underway that the market may be underestimating.
**Capital Markets: Improved Activity, Selective Development**
Severino believes improving capital market conditions will support better pricing and transaction volumes. However, high input and financing costs will likely dampen most forms of new development—excluding high-demand categories like data centers and specific industrial segments.
O’Kane added that foreign investors may reinvigorate interest in U.S. CRE due to the declining value of the dollar. Liquid coastal markets are likely to benefit first. He also noted that ongoing high inflation and fiscal deficits are keeping Treasury yields elevated, but predicted a cautious uptick in transactions and development over the coming year.
**The Bottom Line: Planning for Long-Term Resilience**
Moody’s Ermengarde Jabir advised focusing on asset types and locations tied to long-term demographic growth. Properties meeting essential needs—particularly food-related retail—are primed for stability and success.
Yet, O’Kane noted that risk remains on the macroeconomic level. “Neither political party has shown urgency in addressing the structural deficit, and markets now openly discuss that today’s borrowing costs may be more permanent than cyclical,” he warned.
While a fiscal crisis is not expected in the near term, O’Kane concluded with a sobering reminder: “CRE is uniquely exposed because long-term rates and global capital flows are central to how our sector functions.”
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