CRE Stabilization Broadens as Fundamentals Drive Returns: 2Q26 Webinar Highlights

CRE values continued to stabilize in the second quarter, supported by improving fundamentals and stronger transaction activity. The NFI-ODCE posted its strongest gross total return in four years, while property values increased for the eighth consecutive quarter. SitusAMC’s Real Estate Valuation Services (REVS) team discussed these trends during its August 20 webinar, “Interpreting the Data: Current Valuation Trends and State of the CRE Market.” 

SitusAMC Managing Director Andrew Sabatini and Director Meredith Young were joined by guest speaker Brian Thomas, Head of Analytics at IDR Investment Management. Drawing on NFI-ODCE performance, transaction and appraisal data, capital markets trends and property-level analysis, they discussed what’s driving recent improvement in returns and what lies ahead for the rest of 2026. Here are six key highlights: 

1. Property-Level Performance Tells a More Stable Story Than Headline Returns 

The NFI-ODCE posted a 1.49% gross total return in 2Q 2026, its strongest quarterly performance in four years. But the panel cautioned against viewing the quarter as a sudden acceleration in CRE performance. Fund-level results have been influenced by leverage, cash balances and debt mark-to-market effects, which can obscure the steadier performance of the underlying properties. 

At the property level, unlevered returns have consistently exceeded 1% and were approximately 100 basis points (bps) higher than fund-level returns over the past eight quarters. Meanwhile, market values have now increased for eight consecutive quarters. 

“The data, I do think, has been telling more of a stable story for a while now,” Sabatini said. He noted that periods of flat or negative appreciation were largely attributable to capital expenditure drag and isolated outliers rather than broad-based value deterioration. In the past two quarters, value gains have again begun to outpace CapEx. 

That stabilization is also becoming more widespread. Approximately 70% of ODCE properties are now producing positive quarterly total returns, according to Thomas, while 95% fall within a relatively narrow return range around zero. “There’s a lot of conformity in these total returns with a positive skew,” he said. 

2. Higher Rates Have Yet to Push Cap Rates Higher 

The 10-Year Treasury has remained above 4.4% for much of the summer and recently hovered between 4.6% and 4.7%. Yet cap rates were essentially unchanged between the first and second quarters. 

Young explained that investors have become accustomed to short-term rate volatility and continue to underwrite real estate based on longer-term expectations. SitusAMC has generally viewed a 10-Year Treasury between 3.5% and 4.5% as a relatively neutral range for cap rates. A sustained move above that level could eventually affect underwriting, but the impact would likely take time to emerge. 

“If this 4.5%-plus 10-Year Treasury persists throughout third quarter and the rest of the year, that's really when we could start to see some impacts on cap rates, perhaps late ’26, early ’27,” Young said. For now, early 3Q valuation indications suggest cap rates remain largely stable. 

Higher rates also provided a short-term boost to 2Q fund returns through debt mark-to-market, adding approximately 13 bps after detracting roughly 40 bps over the previous four quarters. With ODCE borrowing costs and cap rates both near 4.6%, leverage is currently having a relatively neutral effect on performance. 

3. NOI Growth Is Near a Cyclical Bottom, but Sector Performance Varies Widely 

Income remains critical to the outlook, but aggregate NOI growth has been nearly flat over the past year. Thomas characterized NOI as perhaps the most important indicator to watch, noting that long-term growth has historically been around 3%. The panel expects current weakness to represent a cyclical bottom, with improving occupancy and slowing supply setting the stage for stronger growth. 

The headline numbers, however, mask considerable differences by property type. Senior housing generated approximately 12% annual NOI growth, while retail posted about 6%. Within retail, malls recorded roughly 8% growth and street retail approximately 17%, while strip centers were closer to 2%. 

Office NOI growth remains negative but is improving. Industrial and residential growth has also moderated, though pockets of strength are emerging. Advanced manufacturing produced approximately 8% NOI growth in the quarter, while warehouse growth was below 2%. San Francisco multifamily stood out with roughly 10% quarterly NOI growth. 

The combination of strengthening occupancy and sharply declining construction could become increasingly important. New supply growth has fallen substantially, with office and retail construction now below 0.5% of existing inventory and industrial and apartment deliveries also declining. Thomas said those conditions could create a stronger supply-demand environment in which NOI growth, rather than cap-rate compression, drives future returns. 

4. Retail Remains Consistent While Alternative Sectors Gain Ground 

Retail continued to distinguish itself through durable cash flow and consistent value growth. While some alternative sectors are producing more dramatic gains, Young compared retail to the “tortoise” of the market: less flashy, but steadily moving forward. 

Senior housing, self-storage and data centers also posted strong results. However, the panel emphasized the importance of considering their relatively small weight within ODCE. Senior housing, for example, represents only about 1% of the index. 

Data centers illustrate another important dynamic: Substantial appreciation does not necessarily translate directly into capital returns. Market value in the ODCE “other” category, which is primarily composed of data centers, increased more than 20% over the past year. After accounting for CapEx, however, the increase was closer to 1%. 

Life science remains at the opposite end of the spectrum. It was the only sector to post a negative total return in 2Q 2026, and panelists expect continued pressure as limited core allocations and potential transactions create further price discovery. In some markets, owners are even considering converting former life science space back to traditional office use, though the economics vary significantly depending on the property and existing infrastructure. 

5. Transaction Data Is Increasingly Validating Current Valuations 

Transaction activity within ODCE slowed during the first half of 2026, but broader market data paints a stronger picture. MSCI data showed approximately $229 billion in first-half transactions, up 15% from the same period in 2025. Green Street data covering larger transactions showed an even greater increase, with approximately $164 billion in sales, up 30%. 

Just as important is the relationship between transaction prices and appraised values. Across approximately $12.2 billion of ODCE transactions over the trailing four quarters, sales prices were within roughly 1% of prior appraised values. Office transactions averaged 5.7% above prior appraisals, though Sabatini cautioned that the result primarily reflects demand for higher-quality office assets rather than a broad sector recovery. 

SitusAMC’s broader back testing produced similar results. An analysis of approximately $20 billion across more than 250 transactions compared sales prices with valuations from two to four quarters before the sale. Even as the measurement period expanded, the variance generally remained within approximately plus or minus 1% to 1.25%. 

“It does make it increasingly difficult to argue that valuations are materially disconnected from the market,” Sabatini said. 

6. Early 3Q Data Points to Continued Positive Returns 

Looking ahead, the panel expects many of the second-quarter themes to carry into 3Q. Cap rates remain stable so far, while tech-oriented markets are showing notable momentum. San Francisco delivered the strongest total returns among major markets in 2Q, according to Young, with strong multifamily lease trade-outs and property fundamentals continuing into the current quarter. 

Thomas also shared IDR’s daily estimate of NFI-ODCE performance. As of August 20, approximately 50 days into the quarter, the index was tracking around a 50-bp net total return, broadly consistent with its position at the same stage of recent quarters. IDR’s current projection is approximately 1.36% net for 3Q, equivalent to roughly 1.5% gross. 

“I think third quarter is going to look like the second quarter,” Thomas said, pointing to improving industrial leasing activity and relatively little evidence of property-level deterioration. 

The outlook remains subject to higher-for-longer interest rates and uneven performance across sectors and markets. But with values increasingly stable, transaction prices closely aligned with appraisals, supply declining and occupancy improving, the panel sees a market in which property fundamentals are becoming the primary determinant of performance. For investors, that puts the emphasis increasingly on asset selection, cash-flow durability and the markets and sectors best positioned to translate improving fundamentals into NOI growth.  

Watch a recording of the webinar here or download the slides here. For more information on SitusAMC’s Real Estate Valuation Services, visit our website.