Liquidity and sales volume have improved, but real estate industry leaders have varied expectations for capital market conditions in 2026 and beyond.
For commercial real estate investors, the glass is half full—fueled by lower interest rates, abundant debt, and pent-up equity demand.
The glass is half empty, with higher long-term rates, sidelined equity, and less foreign investment.
Either way it plays out, a new source of liquidity is likely ahead. Private real estate added into retirement plans would provide a significant boost to demand for the asset class.
“Invest now, and you’re going to have returns in the next few years.”
Transactions
In the first half of 2025, total investment sales volume increased 16 percent over the prior year, to $221 billion. Transaction activity increased across sectors, with apartments leading in total volume and senior housing, showing the strongest year over year growth. The leading buyers during this period are private investors—local or high net worth—and sovereign wealth funds. This renewed activity is a welcome return to the 20-year average trend of $112 billion per quarter.
Equity
Emerging Trends survey respondents expect improved availability of equity, with some variation by source. Ratings for 2026 are slightly higher than last year’s ratings for all sources except foreign investors. The top three rated sources of equity capital are private equity, private local investors, and institutions/pension funds. That survey respondents ranked private local investors above institutional investors reflects the caution institutional investors have maintained during the recent uptick in transactions.
Debt
Liquidity is expected to remain robust across all sources in the coming year. Nonbank financial institutions and debt funds are rated as the top lending sources, while commercial banks and insurance companies received the largest boost in ratings among all lenders. Government-sponsored entities (GSEs) were rated as the top lending source in last year’s Emerging Trends survey but have fallen to the bottom of the list for 2026. However, this is the only lending source expected to reduce its activity.
Despite the generally positive consensus on liquidity, our interviewees shared diverging views for capital market conditions ahead, depending on their macroeconomic views.
“2025 was not the year we expected. We are investing in a discerning way.”
Half empty
Investors expecting short-term interest rates to remain higher-for-longer also have higher expectations for the 10-year U.S. Treasury yield. Transaction activity is therefore expected to remain muted with a persistent pricing gap between buyers and sellers.
The half-empty case expects moderate deployment of dry powder from sidelined equity investors and does not anticipate cap rate compression. Reduced foreign investment in U.S. real estate is another limiting factor for transaction activity in this case. In the first half of 2025, foreign investment volume was nearly flat year over year, with Canada and Japan becoming net sellers. The $5 billion reduction in Canadian exposure to U.S. real estate in the first six months of 2025, as reported by MSCI Real Assets, lends credence to this view.
“Every international capital raise discussion we have revolves around surprising moves out of Washington, D.C. A persistent headwind to U.S. inflows.”
Some investors with this forward view on capital markets are shifting to higher-yield strategies, only to find that opportunistic returns from market dislocation are easier to access off-market, including via secondary funds. Half-empty investors also expect some distress to emerge from the headwinds to real estate demand. Tariffs, less immigration, and lower economic growth could reduce leasing activity and pressure net operating income such that less well-capitalized owners bring assets to market. However, assets facing fundamental distress often need significant capital improvements, limiting the upside without a significant discount to replacement cost.
“Real estate values are correlated to the cost of debt and interest rates should come down next year with a new Fed chair.”
Half full
Industry leaders expecting lower interest rates in 2026 have an alternative view. They see abundant capital waiting to be deployed into real estate and expect this pent-up demand to be unleashed by the lower cost of debt. The wide variety of debt and credit available across multiple lending sources is another positive for liquidity in the half-full case. The boost to investment sales, plus lower rates, is anticipated to drive up real estate values and compress cap rates.
“There’s an incredible appetite to put out debt. Once equity finds a transaction point, the debt is ready to go.”
Demand growth amid supply constraints also gives half-full investors plenty of optimism for real estate. The lack of near-term construction is generally expected to support real estate values and net operating income. In the half-full case, the reshoring of manufacturing and favorable tax policy changes are anticipated to boost economic growth and support stronger leasing activity.
More liquidity ahead
In August 2025, an executive order directed the Secretary of the Department of Labor to revisit guidance on including private assets in defined contribution (DC) plans, and the real estate industry anticipates this new equity source to fuel further liquidity.
Large firms are optimistic and likely to be the first movers in launching funds that give retail investors access to direct real estate. Some industry leaders are concerned that these individual investors may not fully understand the complexity of investing in private alternatives. Nonetheless, the action to allow private assets in retirement-savings accounts is leading to the creation of new real estate investment vehicles within 401(k) plans.
As of year-end 2024, a Defined Contribution Real Estate Council (DCREC) survey reports that $38 billion of net assets under management is invested in dedicated real estate DC vehicles. The survey also reports that another $8 billion of DC capital is in institutional open-end funds. These investments were in place before the updated policy guidance and reflect the existing appetite for inclusion of private real estate in these funds.
The timeline for full adoption of private real estate into DC funds remains uncertain, but industry leaders believe the potential scale is significant—likely reaching the trillions. This new equity source could drive considerably more development and investment across property types.
