Commercial real estate (CRE) is drawing renewed attention as investors reassess allocations amid rising concerns about the durability of private credit returns. Slowing earnings growth, elevated leverage, and tighter refinancing conditions have raised questions about the performance trajectory of some private credit strategies. In contrast, CRE has already absorbed a meaningful reset, offering clearer visibility into valuations and underwriting conditions. Against this backdrop, several themes have emerged that clarify CRE’s position in the cycle and its role as a complementary component within portfolios alongside other private market allocations.
Unlevered U.S. CRE values declined more than 25% from early 2022 to late 2023, according to Green Street, with other major indices showing similar retrenchment. Today, traditional signals point toward recovery:
- Public REIT valuations, which typically serve as an early indicator of cyclical shifts, are up more than 40% from 2023 lows.
- Private valuation indices are rising.
- Credit markets are functioning again, supporting higher transaction volumes.
- Distress continues to surface, consistent with its role as a late cycle indicator.
These trends are not unique to the U.S., as European-listed REITs currently stand more than 45% above their October 2023 lows on a USD basis and +35% on a EUR basis. In fact, European private real estate outperformed the U.S. in 2025 with unlevered total returns of +6.8% vs ~5% in the U.S.
The correction in CRE was unusual this cycle, as it occurred despite a resilient macro backdrop and strength across broader risk assets. This is because CRE is inherently a levered asset class – levered returns were pressured as decelerating (albeit well above trend) NOI growth was insufficient to overcome the rise in financing costs and tightening lending standards. While this disconnect has raised valid concerns, historical patterns, including the early 2000s, indicate that real estate can perform well even as other assets may start to lag.
In short, CRE has already undergone its valuation adjustment, while many other private markets have yet to move through a comparable repricing.
Historical analysis suggests that real estate cycles are longer and more durable than consensus may believe. Recovery typically lasts roughly 2 years, while expansions often last 12–13 years.
They are supported not only by price appreciation but also by steady, and often underappreciated, income generation. While income accounted for just 44% of total returns in the ODCE index from 2010 to 2019, a period when historically low interest rates disproportionately boosted capital returns, income has contributed more than 80% of total returns over full market cycles. This dominance of income reflects the structural strength of CRE, not a limitation.
Both public and private market data indicate that the current cycle remains early by historical standards, with valuations recovering but still below prior peaks and private markets lagging public markets in a familiar pattern. U.S.-listed REITs were within 1% of their prior-2021 highs at the end of February 2026, indicating a shift from recovery to expansion, but have subsequently pulled back in March amid geopolitical events and now stand approximately -4% below their peaks as of March 17, 2026.
That said, a V-shaped recovery in headline valuations remains unlikely given the lack of meaningful stimulus. Instead, returns are expected to normalize gradually. While that may suggest a U-shaped path, widening dispersion in returns across property types and markets points to something closer to a K-shaped recovery.
This unevenness isn’t a flaw in the cycle; it is the cycle. Investors are no longer confronting a broad-based downturn; they are navigating widening dispersion. The cycle ahead will likely be alpha-driven, and real estate investors will increasingly need to take a page from equity markets, where asset and market selection drive performance. Structural themes will remain important, but clearing return hurdles requires sharper focus and execution.
Unlike the post-global financial crisis (GFC) period, when returns were amplified by accommodative policy and financial engineering, the next phase of performance will hinge on property fundamentals and effective asset management. Net operating income will likely drive both income returns and capital returns in a higher-for-longer rate backdrop where cap rate compression is limited.
As investors revisit their private market allocations, the appeal of steady, collateral backed income has grown. CRE has already moved through its reset, and strategies that can provide stability while still participating in the recovery are drawing greater interest. That shift has brought renewed attention to private CRE debt, which can serve as a natural complement to traditional private credit.
- Origination opportunities are building. While increased competition has led to some spread compression, the Mortgage Bankers Association forecasts total CRE originations to increase by 27% in 2026.
- Risk adjusted returns remain compelling, supported by conservative loan to value ratios on property values that are marked down from their peak. Importantly, CRE mortgages are secured by income producing real estate – the property itself serves as the collateral and does not disappear overnight.
- The stability of returns is often underappreciated. CRE debt funds have not produced a single quarter of negative total returns from 2014–2025, a period that includes both the pandemic shock and the recent valuation downturn.
- Portfolio construction benefits can be meaningful. Allocating to CRE debt within a broader mix of private corporate credit or private equity may help reduce volatility, improve Sharpe ratios, and mitigate drawdown risk. These benefits may become even more relevant, given that CRE debt has already repriced, while private credit and private equity have not yet had a comparable reset this cycle.
While returns are expected to normalize gradually, the headline indices are suffering from the law of averages.
For instance, while the U.S. ODCE index produced returns of +3.8% in 2025, the top quartile of funds generated returns of +6%, the second quartile of +5%, the fourth quartile of +4%, and the bottom quartile of slightly negative returns. European ODCE funds also showed dispersion in returns, with the spread between the top and bottom quartiles exceeding 300 bps. While the top U.S. funds are outperforming in line with Europe, the bottom U.S. funds are underperforming their European peers.
Furthermore, single-sector strategies in Europe have materially outperformed multi-sector portfolios, reinforcing the idea that selectivity, not broad-market beta, will drive returns in this phase of the cycle.
In an early‑cycle environment, risk‑forward strategies may offer greater upside. Core+ strategies targeting 8–10% gross returns and value‑add or opportunistic funds targeting ~15% may be well‑positioned as the recovery broadens. However, it’s important to recognize that headline value add and opportunistic returns have historically underperformed core strategies. This is because selectivity matters even more as investors move out the risk spectrum.
CRE sits at a fundamentally different point in the cycle than private credit and other private market strategies. It has already undergone its valuation reset, entered recovery, and is supported by improving fundamentals and long-cycle dynamics. In this context, CRE debt provides stability and attractive, risk-adjusted income, while selective exposure to CRE equity can offer early-cycle growth potential. Together, these dynamics create a compelling case for CRE as a complement to private credit in diversified portfolios.
For additional perspectives, recent insights on CRE cycles, valuations, and what it means for asset allocation can be found below:
Five themes shaping global real estate in 2026: European investors’ perspectives
The (CRE)covery: How long do CRE cycles last?
Private Real Estate Debt: A banner 2025, with more room to run
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Risk considerations
Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. Private market investments, unlike publicly traded stocks, involve various risks due to illiquidity, lack of transparency, and higher minimum investment requirements. These risks include liquidity risk, market risk, capital risk, and regulatory risk. Additionally, private market investments often involve higher fees and expenses and may have longer investment horizons. Commercial real estate (CRE) investing carries several inherent risks, including those related to the economy, interest rates, market fluctuations, high upfront costs, and tenant-related issues like defaults or high turnover. Economic downturns can lead to decreased property values and increased vacancy rates, while financing costs, insurance expenses, and potential environmental or structural problems can also pose significant challenges. All these factors and risks can impact rental income and overall investment returns.
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