Outlook 2026: New dawn for real estate?

“It’s been a slow dawn, but a dawn nevertheless,” says Daniel Mahoney, Europe head of research and strategy at LaSalle Investment Management, describing the past year which has seen investors’ sentiment swing back and forth between hopeful optimism and disappointing realism. As 2026 gets under way, Mahoney is convinced that European real estate is finally breaking out of this “time loop” and is on its way to enter a new cycle.

“All three conditions which are required for recovery are in place and we expect the market to gradually start picking up steam,” Mahoney comments. He lists those conditions as the availability and attractiveness of debt, strong occupational fundamentals and the completion of the repricing process. “In the euro area the spread between prime yields and the Eurobond swap rate is about 300bps which is the widest it has been since 2022, and this is a big factor that will fuel real estate. We also think that the repricing is largely complete, as capital values have gradually improved for the past six quarters. Finally, occupier conditions are solid; looking at our own portfolio we see a positive rent trade-out of 3.8% for spaces up for lease renewal which is on top of mostly indexed rental rates, suggesting that rental growth has outpaced inflation.”

Altogether, these conditions are expected to usher in a new cycle which experts believe will be markedly different from the past. Throughout Europe interest rates – although declining – are forecast to remain significantly higher than the historically near-zero rates seen during the 2012-2022 period. In the new cycle, nominal expected returns will hence be higher than the past, with income representing a larger component of those returns. Finally, global regions are proving to be less and less correlated with each other, and LaSalle IM expects this divergence to increase in the near future. This is particularly evident when looking at European and US REIT returns as real time high frequency signals. “The correlation between these returns has dropped significantly towards zero over the past year, confirming that these two regions are moving in different directions,” explains Mahoney. “This data also suggests that European real estate offers investors more diversification benefit at this moment in the cycle than is typical.”

While Europe’s real estate occupier markets have traditionally trailed those of the US, the situation seems to have reversed in the recent past with the US showing a slower pace of recovery. Says Mahoney: “Europe’s turnaround from an occupier’s point of view has been ahead of the US, where there have been more deliveries of residential constructions and where the office market has historically been less balanced. We are, however, seeing construction pipelines retreat heavily now in the US as well so we expect to see the occupier markets pick up in a similar way, following Europe.”

Limited supply is expected to be the US’ strongest cross-sector theme heading into 2026.

Due to higher financing and construction costs as well as lower valuations, development pipelines are plummeting, which will help position most property types for improving rental dynamics. But much like the start of 2025, the prevailing sentiment in 2026 is one of caution. “We started 2025 with some promising fundamentals but then the US tariffs cast a vast cloud of uncertainty,” says Jim Costello, head of MSCI’s real assets research team, with responsibility for the Americas. “Late in 2025, it was clear that the US had some inflation pressure, while consumer surveys showed that people are being prudent and there are concerns about the job market.”

US market drivers

The most notable difference in US real estate markets compared to a year ago is arguably the improvement in the debt capital markets. The risk-adjusted returns of lending are appealing, as investors are able to earn higher yields on the credit than the equity of the very same assets. “Commercial real estate (CRE) is operating in an inverted environment where debt is the most favourable strategy at the moment,” notes MSCI’s Costello. “In terms of risks and rewards debt funds offer a modest return at a low risk while on the private equity real estate side, the repricing hasn’t occurred to such an extent to make the risk-return trade-off appealing.”

Real estate capital fundraising in the US is well below historical averages, with a large number of US open-ended funds still working out their redemption queues. Global investment advisory firm bfinance estimates that redemption queues for US core funds currently represent 12% of NAV on average. “Many of the larger core funds have struggled repositioning their portfolios and reducing exposure to the office sector,” explains bfinance’s real estate head Ishan Issadeen. Core-plus funds have shown themselves to be more resilient through the recent dislocation thanks to higher allocations to alternatives such as life sciences, data centres and self-storage, he adds.

Looking ahead, experts believe there is significant dry powder waiting to be deployed, and that could pick up in 2026 with lower borrowing rates and improving market fundamentals. “While investors have generally slowed down equity allocation over the past two years, they are now anticipating a more normal distribution environment and they are investing new capital in commercial real estate markets,” comments Andrew Holm, head of US diversified equity for Ares Real Estate. The alternative investment manager sees the most compelling opportunities in acquiring and repositioning stranded assets. “A number of 2021 and 2022 vintage deals that closed at the peak of the market faced pressure when interest rates changed and the owners are now running out of time or money. Much of what we are doing is acquiring these types of assets,” he adds.

Interest rates are expected to decline in the US, and further rate reductions are likely to accelerate normalisation in the property markets, adds Jeff Bingham, managing director & co-head of global investment research at Heitman. Bingham believes that capital availability for 2026 remains robust, with an increasing proportion allocated to equity. “A substantial amount of this capital has stayed on the sidelines since the onset of the interest rate hiking cycle, as investors awaited the conclusion of the devaluation phase and the return of their invested capital. With the devaluation cycle now largely behind us, capital deployment should be poised to accelerate in 2026.”

Asia-Pacific dynamics

While headline inflation in the US and in most developed economies is under control, a notable exception is Japan. Here, interest rates are on a rising trajectory for the first time in a generation, and this is likely to drive some international investors away to the benefit of neighbouring countries. “Japan has traditionally captured most of the real estate allocations headed for Asia but for next year, we expect to see more diversification into markets like Singapore and Australia,” comments Ada Choi, who leads CBRE’s research team in Asia Pacific. “South Korea has already seen significant activity this year and is growing in liquidity, transparency and scale.”

Cross-border investment in Asia Pacific surged 88% in the first three quarters of 2025 and CBRE is forecasting a similar pattern for 2026. Rental growth in particular will be supported by limited construction pipelines which are expected to get thinner and thinner, adds Choi. Higher rates, limited global migration and cost inflation have pushed the cost of replacing CRE above the value of existing properties, making large-scale new construction economically unviable. Says Choi: “Rising construction costs have had a profound impact on the supply of projects in this part of the world, particularly in Australia. Here, the costs of developing a new office building simply do not make sense compared to rental levels. Countries like Japan are starting to see labour shortages. This will continue to limit the availability of stock and is one of the main reasons why we expect the office market to perform well this year.”

Similar dynamics are to be found in Europe, where centrally located offices and luxury high-street retail have surprisingly emerged as standout performers after years of subdued supply. Prime office rent changes in Paris CBD and London City now average close to 10% annually, while retail property rents on London’s Bond Street and Paris’ Champs-Elysées continue to consistently outpace inflation, according to research from LaSalle IM. “Central offices with sustainability credentials have surprised positively over the past year and so has luxury high-street retail, which we see as an especially mispriced opportunity,” comments Mahoney of LaSalle IM. “Not only is the supply of this space limited, it is also the case that tenants are inelastic in their demand; they want what they want and are not willing to compromise on location.”

Focus on operational strength

In a world where, for the foreseeable future, extensive cap rate compression is no longer on the cards, strong returns will be all about operational strength and income strategies, says Chris Brett, head of capital markets Europe at advisor CBRE. “Looking at where global capital is focused, Europe remains a big target, and operator selection within Europe will be crucial for investors,” he comments. Operators focusing on long-income strategies will continue to benefit from this trend, as will operationally intensive alternative sectors like student housing, senior living and data centres which grew to account for over 20% of investment activity in 2025. Data centres in particular will be a target for both real estate and infrastructure investors, points out Brett. “Data centres are positioned at the intersection of real estate and infrastructure and we have already seen evidence that big groups are using infrastructure money to buy into this segment. We expect this dynamic to continue going forward, bringing more capital into this asset class.”

While transactional activity is forecast to rise across the globe, Europe is expected to see the strongest relative investment growth in 2026, with research from Savills forecasting an increase of 22% to $300bn (€256bn). The Americas will, however, remain the largest real estate investment market overall, at $570bn.

“Europe is our second-largest region globally, and we expect to continue deploying capital here in 2026 as declining rates and improving sentiment create a compelling environment for investment, particularly from sellers seeking liquidity,” comments Samir Amichi, head of real estate acquisitions Europe at US asset management giant Blackstone. “While GDP growth remains modest, we see secular tailwinds in our high conviction themes – digital infrastructure, logistics, leisure, to name a few.”

Blackstone built significant momentum in 2025 with acquisitions including Warehouse REIT in logistics, RCN in leisure, and City Quartier Trocadéro in the prime office space. By the end of the third quarter, the firm had committed more equity in European real estate than in full-year 2024, adds Amichi. “With capital markets far more constructive than a year ago, improving liquidity should support greater transaction activity, and we will continue to aim to sell selectively and acquire where the fundamentals are strongest.”

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