With loan originations rising, underwriting remaining disciplined, and property values having stabilized after meaningful resets, CRE debt offers compelling return potential relative to risk. Beyond headline yields, its stability and low volatility make it an effective portfolio diversifier. Allocating to CRE debt alongside private equity or private credit has historically improved overall portfolio efficiency and reduced drawdowns, even when absolute returns were modestly lower. As investors increasingly prioritize resilience and risk management, CRE debt stands out as a valuable complement within portfolios.
Commercial real estate (CRE) debt is positioned for a constructive 2026. While increased competition has compressed spreads, the opportunity set for lenders continues to expand. The Mortgage Bankers Association forecasts total CRE originations to rise another 27% in 2026, supported by a wave of loan maturities, accelerating transaction volumes, and steady refinancing demand across property types. Capital is being deployed into a market defined less by distress and more by renewed activity.
Importantly, this growth is occurring alongside continued underwriting discipline. Loan-to-value ratios have remained conservative, and property values have already reset by roughly 20% from their peaks. The combination of recalibrated asset values and measured leverage provides downside mitigation and supports compelling return potential.
The more underappreciated story may be CRE debt’s role in portfolio construction. Historically, open-ended CRE debt funds have delivered steadier performance with lower volatility than private equity and private corporate credit. When blended into broader private markets allocations, this stability has improved return efficiency, allowing investors to earn more return per unit of risk and reducing drawdowns. Additionally, CRE debt has already navigated a downturn, while other private market strategies have yet to experience a comparable reset this cycle.
With originations rising, underwriting intact, and valuations stabilized, CRE debt offers attractive risk-adjusted returns. Beyond yield, its resilience and diversification benefits make it a valuable complement within portfolios.
For a deeper dive into the opportunity set in CRE debt, read our full 2026 CRE Debt Outlook: A banner 2025, with more room to run.
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. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. 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. Private debt investments, like alternative investments are not suitable for all investors given they are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales, concentrated investments and may involve complex tax structures and investment strategies.
The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers. Principal Life, Principal Funds Distributor, Inc., and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.
Principal Asset Management leads global asset management at Principal.®
For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.
In Europe, this communication is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients.
© 2026, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.
