CRE Recovery Faces Another Setback: ValTrends Report 1Q 2026

Signs of a sustained commercial real estate (CRE) recovery once again faced disruption in the first quarter of 2026, according to “Recovery Interruptus,” the latest ValTrends report from SitusAMC. This quarterly analysis from SitusAMC Insights examines key developments in the economy, CRE property sectors, capital markets and the investment environment. 

The report’s theme reflects the repeated pattern that has challenged CRE over the past several years: improving market conditions derailed by external economic and geopolitical events. After optimism grew late last year amid expectations for lower interest rates and improving liquidity, renewed inflation concerns tied to geopolitical instability, including the Iran War, have clouded the outlook for rate cuts and commercial mortgage pricing. 

“CRE continues to show resilience, but the recovery path remains uneven,” said Peter Muoio, PhD, Head of SitusAMC Insights. “Each time the market appears poised for stronger momentum, broader economic or geopolitical developments create new uncertainty around inflation, interest rates and capital costs.” 

CRE Sentiment Softens as Investors Seek Stability 

After ranking as investors’ preferred asset class for three consecutive quarters, CRE slipped in SitusAMC’s proprietary quarterly survey. CRE tied with bonds for the second-most preferred asset class behind cash, as investors cited a slower-than-expected recovery and relatively muted returns. Concerns that higher interest rates could persist longer than anticipated also weighed on sentiment. 

Meanwhile, overall CRE performance remained relatively stable. As of the first quarter, NCREIF’s NPI benchmark has transitioned to the Expanded NPI, and overall CRE returns were essentially unchanged during the quarter. Following nearly two years of negative returns, the market has now experienced six consecutive months of growth. One-year trailing returns reached 4.9%, among the highest levels since 2022, while capital returns were among the strongest since the Federal Reserve began aggressively raising rates in mid-2022. 

“While investors have become more cautious, there are still encouraging signs beneath the surface,” noted Jen Rasmussen, PhD, Vice President of SitusAMC Insights. “CRE fundamentals are stabilizing in several sectors, and returns have improved meaningfully compared to where the market stood a year ago.” 

Investors Shift Back Toward Holding Assets 

After signs of a market thaw emerged late in 2025, investors became more cautious during the first quarter. SitusAMC Insights found that the preference to hold CRE assets increased to 70% from 63%, while the preference to buy declined to 26% from 30%. The inclination to sell also fell, dropping to 4% from 7%. 

Although buying sentiment softened quarter-over-quarter, the buy recommendation remains near its 10-year average, suggesting investors are still actively evaluating opportunities despite uncertainty around rates and the broader economy. 

Capital Discipline Tightens as Lending Slows 

Both equity and debt capital became more disciplined during the quarter, with availability declining and underwriting standards tightening, according to investors surveyed by SitusAMC Insights. Lenders are increasingly focused on resilient assets with strong fundamentals, contributing to slower transaction activity and fewer workout opportunities. 

CRE and multifamily borrowing volumes declined 30% during the first quarter, according to the Mortgage Bankers Association (MBA), though activity remained approximately 50% higher year-over-year. The quarterly slowdown was largely expected due to normal seasonal trends, but declines were broad-based across multifamily, office and industrial sectors. 

Banks, life insurance companies and GSE lenders all reduced originations by roughly 35% to 40% during the quarter. However, investor-driven lenders remained highly active on a year-over-year basis, increasing activity by approximately 130%, while bank lending volumes rose 80% compared to one year ago. 

Apartment Sector Emerges as Investor Favorite 

Among property sectors, multifamily emerged as the strongest performer in SitusAMC Insights’ investor survey. Preference for apartments surged from 44% to 60% during the quarter, marking the highest rating for the sector in one year. Amid geopolitical uncertainty and economic volatility, investors continue to favor the relative stability and defensive characteristics of multifamily investments. 

Office sentiment, while slightly lower than the prior quarter, continued to show meaningful improvement compared to recent years. Preference for office declined six percentage points following a sharp increase in the fourth quarter, but it still represented the sector’s second-highest rating since the onset of the pandemic and tied industrial for second place among property types. One year ago, office ranked last among sectors, with only 4% of investors favoring the segment. 

“The office sector remains challenged, but investor perceptions have improved substantially from a year ago,” said Rasmussen. “Many investors believe repricing has created selective opportunities, particularly for well-located assets and repositioning strategies.” 

Weak Absorption Pressures Core CRE Sectors 

CRE fundamentals remained under pressure during the quarter, particularly due to weak absorption trends across most property types and metros. SitusAMC Insights’ proprietary data showed renewal probabilities declined across the major CRE sectors in the first quarter. Multifamily experienced the largest decline, falling 80 basis points (bps), while retail and industrial each dropped approximately 70 bps and office declined 60 bps. 

Office renewal probability now stands at 54%, nearly 1,000 bps below its long-term average, underscoring the sector’s ongoing leasing challenges. By comparison, renewal rates across the remaining core sectors remain slightly above long-term averages. 

Alternative property sectors, however, demonstrated stronger momentum. Affordable housing posted the largest increase in renewal probability during the quarter, rising 470 bps to its highest level since late 2024. Self-storage and senior housing each increased 370 bps, while data centers and medical office also posted gains and remained above historical averages. 

Looking Ahead: Recovery Continues, But Momentum Remains Fragile 

While CRE fundamentals and returns continue to improve gradually, the first quarter reinforced how vulnerable the recovery remains to broader economic and geopolitical developments. Persistent inflation concerns and the possibility of higher-for-longer interest rates continue to constrain transaction activity and capital deployment. 

Even so, investors remain cautiously optimistic that improving fundamentals, stabilizing valuations and resilient performance across several sectors will continue supporting CRE over the longer term. 

“Recovery Interruptus” offers an extensive analysis of investor sentiment, performance metrics, capital market dynamics and sector-specific trends. For more details on the first-quarter performance, download the free, 25-page ValTrends report here. Learn more about SitusAMC Insights’ research, analytical tools or RERC data products on our website.