US commercial real estate is finally seeing positive returns after two years of double-digit losses, but significant headwinds remain. A new report from Will Pattison at MetLife Investment Management identifies a “reconcentration” of demand driven by K-shaped income growth and AI job displacement.
Pattison’s report suggests five key questions for commercial real estate, and more importantly, some answers.
1. What impact K-shaped incomes and AI?
The top 10% of earners account for 50% of spending, the highest since 1989, while real disposable income growth for the bottom 80% has stagnated. This K-shaped pattern means leasing demand in 2026 will be tied “to where high-value employment and wage gains concentrate,” favouring coastal multifamily and select office submarkets.
AI adds a second shock: nearly 50,000 job cuts were explicitly attributed to AI in 2025, with broader estimates ranging from 50,000 to 4,000,000, concentrated in entry-level and administrative roles. The report expects “a reconcentration of office demand into markets with deep talent pools and industry clusters,” and warns that performance tied to generic “return to office” narratives will remain unreliable.
2. How long do multifamily margins compress in the Sun Belt?
Well into 2027.
The report urges “caution” on oversupplied markets like “Austin, Charlotte, Nashville, Denver, Phoenix and Atlanta,” where aggressive underwriting persists “despite elevated vacancy rates and flat-to-negative net effective rent growth.”
3. Is industrial mispriced for growth?
Industrial “supply is outpacing demand” with vacancy expected to peak around mid-2026. The report cautions that “pricing is too aggressive on industrial properties with short-dated” leases, especially as vacancy rises in the southern US, implying those assets are mispriced for growth.
4. Are data centres in a bubble?
“Maybe, but modern portfolio theory has something to say too.” Fundamentally, data centres benefit from “strong demand from AI-driven workloads, robust connectivity needs and projected revenue growth of around 7% compound”, with strategic markets like Dallas, Northern Virginia and Chicago offering “attractive pricing”.
Risks include “technological obsolescence and a slowdown in AI funding”, potential oversupply, regulatory hurdles and cost volatility from tariffs and urban site constraints. However, these risks are “largely idiosyncratic and not strongly correlated with broader economic cycles”, which makes data centres valuable diversifiers.
5. Why are investor allocations to real estate still shrinking?
Simply performance: the sector delivered -11% in 2022, -10% in 2023 and only 3% in 2024, leaving it well behind equities, explaining shrinking allocations.
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