The Inside Look with Xander Snyder - Episode 28

Commercial real estate enters the second half of 2026 on more stable footing, with improving transaction activity, returning capital, moderating construction pipelines, and greater market liquidity. Yet uncertainty remains as inflationary pressures, consumer spending trends, and broader economic risks continue to influence demand across property sectors.

In this episode of The Inside Look, Principal Commercial Real Estate Economist Xander Snyder examines the key forces shaping the commercial real estate outlook, including capital markets, multifamily supply dynamics, distressed investment opportunities, and the economic factors likely to influence market performance through the remainder of the year.

Hi, I'm Xander Snyder, and this is First American's Inside Look.

Most data currently suggests that the commercial real estate industry is entering the second half of this year on relatively stable footing. Transaction volume, both sales and refinance activity, is increasing. Prices and cap rates have stabilized. Construction starts have fallen, which will limit future supply and gradually begin to tip multifamily and industrial markets from renters' markets back toward landlords' markets.

Market liquidity is also improving. Lenders, including banks, are becoming more active in the space. Equity capital that has spent the last several years accumulating on the sidelines is now actively pursuing opportunities while discounts persist. Because distress remains elevated, attractive buying opportunities are still available. Once distress is fully resolved, far fewer discounted acquisitions will exist.

In many ways, the commercial real estate market appears healthier than it has in some time. However, that momentum is unfolding against a broader macroeconomic backdrop filled with uncertainty and several potential headwinds to demand for commercial space.

Inflation continues to prove more persistent than many expected. Elevated energy prices reduce consumer discretionary spending, leaving less money available for other goods and services. Credit card delinquencies continue to rise, adding additional pressure on household budgets. There is also concern that elevated stock market valuations, if they were to decline, could reduce spending among higher-income households through the wealth effect. Because these households account for an outsized share of consumer spending, any pullback could have broader economic implications.

Understanding the outlook requires remembering that commercial real estate is fundamentally the business of space. The price investors are willing to pay to own space depends on the rents tenants are willing to pay to occupy it. Those rents, in turn, depend on demand for the goods and services tenants provide from that space.

As I often say, demand to lease almost always drives demand to own.

If demand for a tenant's goods or services weakens because consumers or businesses spend less, landlords will have less ability to push rents higher. In my view, this represents the greatest risk facing the commercial real estate market today: a slowdown in consumer spending or business investment that reduces overall demand for commercial space.

As with many aspects of commercial real estate, meaningful lags exist between economic conditions and property market outcomes. Even if consumers reduce spending at retail locations, most retail tenants operate under multiyear leases. A tenant may eventually decide to downsize, but unless the company faces severe financial distress, that decision typically will not occur until lease expiration.

The multifamily market remains another important story heading into the back half of the year. The current supply overhang will continue to weigh on apartment fundamentals in the near term. I believe this oversupply is temporary, particularly in markets that experienced strong population growth and significant new construction because they were highly desirable places to live.

However, temporary does not necessarily mean brief. Absorbing excess apartment supply, particularly in markets with substantial recent deliveries, could take until the second half of next year. The timeline could extend further if consumer budgets weaken enough to affect household formation decisions.

That said, renter household formation has remained strong, and there are currently no obvious signs of demand breaking down.

Markets facing the largest supply overhangs remain under pressure. Owners and property managers, particularly those leasing newly delivered properties, continue to offer meaningful concessions to attract tenants. Most owners would rather accept a slightly lower effective rent and achieve occupancy than leave units vacant while waiting for future rent growth. As a result, concessions such as multiple months of free rent have become increasingly common.

While leasing concessions do not necessarily signal long-term weakness for a property, they do constrain rent growth. In that environment, net operating income growth becomes increasingly dependent on disciplined expense management.

The commercial real estate recovery is real, and the market is on more stable footing than it has been in some time. Capital is returning, pricing uncertainty has diminished, and the pullback in construction starts should support future fundamentals.

However, better does not mean easy. The next phase of the cycle will be determined not only by capital markets, but also by tenant demand across property sectors and what tenants are willing to pay for space.

Thanks for joining me on this episode of The Inside Look. We'll see you next time.