INSIGHT
The first half of 2026 has done a lot to clarify where commercial real estate stands and where it’s heading. Interest rate uncertainty hasn’t disappeared, but transaction volume is recovering. The AI infrastructure boom is generating real demand, even as supply constraints complicate the picture. Demographics are shifting in ways that are already proving some earlier forecasts wrong. And the gap between high-quality assets and everything else keeps getting wider.
This article breaks down four forces shaping the market right now and what they mean for the decisions ahead.
The Market Has Shifted from Defensive to Cautiously Optimistic
The mood across commercial real estate has changed. After two years of defensive positioning, investors and operators are moving toward measured confidence, though plenty of uncertainty remains.
CBRE forecasts that commercial real estate investment activity will increase by 16% in 2026, reaching $562 billion, nearly matching the pre-pandemic annual average, with total returns expected to be income-driven. Capital is coming back, and transaction volume is following.
According to NAIOP, U.S. commercial real estate markets entered 2026 in a transitional phase marked by improving liquidity, moderating inflation, and persistent rate-driven volatility. The rapid repricing cycle triggered by aggressive monetary tightening appears largely complete, but a valuation recovery remains sensitive to long-term interest rate movements and capital market conditions.
Morgan Stanley’s April 2026 outlook adds further context. Geopolitical uncertainty is elevating real estate’s appeal as an inflation hedge with durable income and long-term structural support, while improved access to debt, growing investor confidence, and pricing discounts are helping revive transactions and draw capital back into the sector.
The recovery has real momentum, but asset selection matters more than it has in years.
The Quality Gap Is Widening, and It’s Showing Up Everywhere
The growing performance divide between modern, well-located properties and older or functionally outdated assets is one of the defining themes of 2026. Office is the clearest example. According to Cushman & Wakefield’s Q1 2026 U.S. Office MarketBeat report, Class A net absorption posted gains in 47 of the 91 markets tracked, while overall vacancy has largely plateaued as older, less competitive stock gets removed through conversions and demolitions.
Prime buildings are pulling ahead while secondary space faces mounting pressure as tenants move toward newer, amenity-rich environments. That pattern is showing up in retail, industrial, and multifamily as well, where efficiency, flexibility, and lower operating risk are increasingly driving both tenant and investor decisions.
For owners of older assets, the window to reposition or repurpose is narrowing, and many are turning to office-to-residential conversions as a result. Cities are actively reducing friction, offering expedited plan reviews, property tax abatements, density upgrades, and infrastructure grants to improve project feasibility.
Developers pursuing conversions are prioritizing buildings with generous floor-to-floor heights, efficient floorplates, and structural compatibility with mechanical, electrical, and plumbing upgrades. ESG reporting requirements from institutional investors are adding momentum, making sustainable adaptive reuse increasingly attractive from a capital-allocation standpoint.
Hybrid living/working layouts are also gaining ground, with built-in work niches and shared coworking zones reflecting how people want to live post-pandemic.
AI Is Creating Real Demand and Real Complexity
The AI infrastructure story is no longer speculative. Data center vacancies remain near historic lows as power constraints and community opposition slow new development, driven by rapid enterprise AI adoption. Demand is outpacing supply, and that imbalance isn’t resolving quickly.
What’s shifted at mid-year is the timeline. Data center power delivery schedules have gotten longer, not shorter. Grid constraints are proving to be a bigger bottleneck than most 2026 outlooks anticipated, and if you’re underwriting data center opportunities, those feasibility assumptions deserve a hard look before committing capital.
Beyond data centers, PropTech is changing commercial real estate by delivering integrated platforms that combine lease analysis, underwriting, and tenant experience in a single stack. Agentic AI is beginning to change how asset managers and underwriting teams operate day to day. For the remainder of 2026, watch whether AI-driven demand expands further into land, utilities, and specialized industrial properties beyond the core data center market.
One broader consequence worth tracking: as construction activity slows outside data centers, reduced project starts could weigh on job creation, local investment, and urban growth trajectories, with ripple effects for anyone with exposure to development-adjacent sectors.
Demographics and Sector Diversification Deserve a Fresh Look
Some assumptions baked into 2026 outlooks at the start of the year are already overdue for revision.
Sun Belt migration is decelerating faster than many models projected, and multifamily markets in those areas are still working through oversupply. Midwest markets like Columbus, Indianapolis, and Milwaukee are drawing attention from underwriting teams willing to revisit their assumptions on secondary markets. Submarket-level demand analysis has gone from a competitive advantage to a basic requirement for accurate rent and vacancy forecasting in the second half.
Senior living may be the mid-year standout across property types, with occupancy near historic highs and new supply still lagging demand. Self-storage is seeing cap rate compression faster than expected. Both deserve a closer look from investors who haven’t revisited their sector allocations recently.
On the healthcare side, medical office properties are benefiting from higher healthcare spending and a broad shift toward outpatient care. Life science tells a different story. Short-term headwinds from weak demand, excess lab space, reduced venture activity, uncertain government funding, and slower expansion by public biotech firms are creating real challenges for that segment.
Industrial is being reshaped by supply-chain realignment, including manufacturing diversification away from China and a broader push for resilience in the face of external shocks. According to Morgan Stanley, U.S. industrial real estate supply is expected to decline over the next several years as high construction costs and lower rents limit new development, a dynamic that could support values even as other sectors face pressure.
Broad sector allocations are a starting point. In this market, real work happens at the asset and submarket level.
Working With BPM
Commercial real estate decisions carry real financial and tax complexity underneath them, whether you’re repositioning an aging asset, weighing conversion feasibility, diversifying a portfolio, or planning a new development.
BPM works in the real estate industry through owners, investors, and developers across property types, bringing practical knowledge of accounting, tax, and advisory questions that come up at every stage of the asset lifecycle.
If you’re heading into the second half of 2026 with open questions about your portfolio strategy, a project in progress, or a need for clearer financial visibility, contact us.
Mark Leverette
Partner, Assurance and Advisory
Outsourced Accounting Leader
Real Estate Leader
Mark has devoted 20 years of experience to entrepreneurial companies. As the Managing Partner of Client Accounting and Advisory Services …
Start the conversation
Looking for a team who understands where you’re headed and how to help you get there? Whether you’re building something new, managing growth or preserving success, let’s talk.