Income Anchors Returns as Recovery Broadens: 1Q26 Webinar Highlights

Commercial real estate (CRE) fundamentals continued to stabilize in the first quarter, though the recovery remains uneven across sectors, markets and asset quality. While higher Treasury yields and ongoing geopolitical volatility continue to pressure sentiment, institutional core real estate performance has remained remarkably steady—supported primarily by durable income and improving property-level fundamentals rather than broad cap-rate compression. That was a central theme of “Interpreting the Data: Current Valuation Trends and State of the CRE Market,” a webinar hosted by SitusAMC’s Real Estate Valuation Services (REVS) team on May 19. 

Brian Velky, Senior Managing Director, Andrew Sabatini, Managing Director, and Dane Anderson, Managing Director, analyzed current valuation dynamics and 1Q 2026 performance across the NCREIF Fund Index – Open-End Diversified Core Equity (NFI-ODCE) Index. Drawing on ODCE transaction data, appraisal trends, capital markets observations and property-level intelligence from SitusAMC’s valuation platform, the panel examined the factors driving returns, where recovery is taking shape and why fundamentals—not financial engineering—remain the defining differentiator in the current market cycle. Here are seven key highlights: 

1. Income Accounts for Roughly 90% of Recent Returns 

The webinar reinforced a trend that has now persisted for nearly two years: income remains the dominant contributor to core real estate returns. Over the past seven quarters, approximately 90% of ODCE total return has come from the income component, with only modest movement in capital appreciation. 

Panelists noted that while income historically contributes closer to 80% of total return over the long term, the current environment has pushed investors back toward a more traditional “cash flow first” framework. In practical terms, that means property performance, leasing execution and NOI durability are carrying significantly more weight than appreciation assumptions. The implication: in a market where cap-rate compression remains limited, steady income generation continues to provide stability even amid broader macro uncertainty. 

2. NOI Growth Has Softened, Though Office Remains the Primary Drag 

While aggregate NOI growth has weakened materially over the past several years, panelists emphasized that office remains the primary driver of the slowdown. Outside of office, most major sectors continue to generate positive annualized NOI growth, generally ranging between 2% and 4%. 

The broader ODCE index briefly dipped into slightly negative NOI growth territory—a rare occurrence outside of major disruptions like COVID-19 or the Global Financial Crisis. However, the panel stressed that the weakness is not broad-based. Instead, historically negative office NOI trends have disproportionately weighed on overall index performance. 

At the same time, there were early signs of stabilization within office portfolios. Leasing pipelines have improved in select gateway markets, particularly New York and San Francisco, and panelists indicated the conversation has increasingly shifted from “whether” recovery occurs to “how quickly” it unfolds. 

3. Treasury Volatility Has Not Yet Meaningfully Changed Valuation Underwriting 

The webinar also addressed recent volatility in Treasury yields, which have risen sharply at times amid geopolitical instability, oil-price shocks and changing rate-cut expectations. The 10-Year Treasury recently moved back toward 4.7%, though panelists cautioned against overreacting to short-term market swings. 

SitusAMC’s valuation teams emphasized that institutional real estate underwriting remains focused on long-term interest-rate expectations rather than temporary capital-markets volatility. Similar rate swings occurred throughout 2024 and early 2025 without materially changing valuation methodologies or pricing behavior. 

As a result, the panel does not currently expect recent Treasury volatility to materially impact second-quarter 2026 valuations unless elevated rates persist over a longer duration and begin altering investor underwriting assumptions more broadly. 

4. CapEx Drag Continues to Shape Capital Returns 

One of the more notable themes of the session was the continued influence of capital expenditures on realized returns. While ODCE has now recorded seven consecutive quarters of positive value increases, much of the resulting capital return has been offset by ongoing CapEx spend. 

Panelists highlighted that the actual market value change between 4Q 2025 and 1Q 2026 was nearly identical—approximately 38 basis points versus 37 basis points—yet overall capital return remained muted because of elevated capital spending. 

Importantly, the panel characterized much of this CapEx as constructive investment activity tied to leasing, repositioning and stabilization efforts rather than distress. Still, in a lower-return environment, those expenditures meaningfully influence realized performance. The webinar also noted that CapEx spending declined notably in 1Q 2026 relative to prior quarters, which may reflect both seasonality and some moderation in heavy repositioning activity. 

5. Retail and Alternative Sectors Led 1Q 2026 Performance 

Retail once again emerged as one of the strongest-performing sectors in 1Q 2026, benefiting from both strong income return and improving NOI growth. The sector’s consistency across markets was highlighted as a major differentiator relative to other property types. 

Meanwhile, senior housing delivered particularly strong quarterly performance, continuing the broader trend of alternative sectors outperforming portions of the traditional “core four.”

Industrial, by contrast, lagged during the quarter despite historically strong fundamentals. Panelists attributed much of the weaker total return to lower income return relative to other sectors, reinforcing the importance of income contribution in the current environment. Life science also remained under pressure. The panel pointed to continued leasing weakness, funding shifts following the COVID-era expansion cycle and persistently heavy CapEx requirements as key drivers behind the sector’s ongoing underperformance. 

6. Asset Quality and Leasing Fundamentals Are Driving Increasing Dispersion 

A recurring theme throughout the webinar was the growing importance of property-level differentiation. While values broadly appear stable to modestly higher, performance dispersion between assets—even within the same market—has widened significantly. 

Panelists emphasized that high-quality, well-leased assets with limited capital needs are consistently outperforming peers. Conversely, lower-quality properties facing occupancy pressure and heavy leasing costs continue to struggle, particularly within office and select Sunbelt markets. Even two properties located on the same street can produce materially different valuation outcomes depending on lease quality, tenant rollover risk and capital requirements. That dynamic reflects what panelists described as an increasingly selective, fundamentals-driven investment environment. 

7. Market-Level Performance Remains Highly Localized 

The webinar included a detailed review of market-level trends across ODCE sectors, reinforcing that real estate performance remains highly localized. While gateway markets such as San Francisco showed renewed strength, several Sunbelt markets continued to work through supply-driven headwinds. Only roughly 40% to 45% of ODCE residential exposure generated positive capital return during the quarter. 

Industrial performance also remained uneven. Southern California continued to weigh on sector-level returns, though panelists noted leasing activity there has recently improved. Phoenix stood out for strong value growth, though much of that appreciation was offset by elevated leasing and capital costs. 

Retail displayed the broadest consistency across markets, with approximately 70% of represented exposure generating positive capital return. Office, while still challenged overall, showed encouraging signs in select gateway markets, particularly New York and San Francisco, where leasing pipelines and investor interest have improved meaningfully. 

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.