Andrew DeNardo drives strategic growth and operational excellence as President of First National Realty Partners.
As we look ahead, the U.S. commercial real estate market remains one of both opportunity and uncertainty. The traditional forecasting methods many investors once relied on have been challenged by a series of unique economic shifts in recent years.
In this environment, bold predictions have given way to strategic discipline. With this in mind, I think the more effective approach is to stay grounded in the fundamentals: monitor key indicators, understand how they interact and remain prepared to react accordingly.
I foresee the coming year favoring owners who can read the signals and stay agile in their response.
Decoding Interest Rates And Cap Rates
The Federal Reserve’s actions will remain a primary driver of market sentiment in 2026, especially following its recent 0.25% rate cut, the first since December. While the market still expects the Fed to continue easing, this does not automatically translate to lower borrowing costs for commercial real estate (CRE).
Loans for CRE are typically priced off of longer-term treasuries, not the federal benchmark rate. It remains a common misconception that a Fed cut leads directly to a lower borrowing rate. If Treasury yields rise, so does the cost of borrowing, regardless of the Fed’s policy moves.
Further complexity lies in the relationship between interest rates and capitalization rates (cap rates). In theory, when interest rates fall, cap rates compress. But in practice, cap rates tend to have a lagging effect, rarely reacting in real time to changing borrowing costs. The key question for 2026 is how quickly (and by how much) cap rates adjust to any rate reduction.
If institutional money believes opportunity is ahead, it may deploy capital sooner, which could put downward pressure on cap rates—even if broader transaction activity has yet to reflect those shifts.
The Broader Economic Picture And A Potential Recession
Beyond interest rates, I see the overall economic climate, particularly the potential for a recession, continuing to influence the commercial real estate sector. The Fed’s dual mandate of controlling inflation while maintaining strong employment puts policymakers in a challenging position.
While a softening jobs market would typically lead to rate cuts, factors like tariffs or rising input costs could keep inflation elevated, limiting the Fed’s flexibility. As noted by business leaders like Jamie Dimon, the possibility of a recession remains a key risk factor for commercial real estate heading into 2026.
The Durability Of Necessity-Based Retail
In a recessionary environment, though not guaranteed, necessity-based retail is likely to remain one of the most resilient property types. When household budgets tighten, consumers usually look to prioritize essentials. As an example, families tend to lean more on groceries and cooking at home rather than dining at restaurants. This was a clear trend during the pandemic, although there were restaurant and dining restrictions during this period.
Discount retailers are positioned to perform well as consumers seek out more value-oriented goods. Mid-priced retailers, on the other hand, tend to be most vulnerable to shifting consumer behavior. Luxury retail often holds steady, supported by a less price-sensitive customer base.
In my view, this environment requires a more granular view. It’s not just about asset class; it’s about tenant mix and financial strength. A power center anchored by a struggling big-box tenant may face real headwinds, while a grocery-anchored neighborhood center with a healthy mix of regional/local tenants may perform well through a downturn. In today’s market, resilience is often found at the tenant level.
The Future Of Retail Development, Rents And Investment Strategy
Historically higher borrowing costs and rising material prices are likely to hold retail development at a relatively low pace in 2026. While some mixed-use projects will move forward, the overall volume of construction is expected to remain limited. This reduced pipeline, combined with healthy occupancy rates, means landlords may continue to hold some leverage when negotiating rents, especially in supply-constrained markets.
However, a recession could shift that dynamic. If economic pressures force some retailers to close or consolidate, occupancies could decline. In that scenario, active communication with tenants is essential. Landlords should maintain a strong bench of prospective tenants, such as expanding retailers like Aldi, which has announced plans for continued store openings, to ensure they’re positioned to backfill space quickly when needed. This can also help landlords optimize the credit quality of a shopping center replacing tenants with bad credit with new creditworthy tenants.
Patience and a discerning eye will be essential. Decisions shouldn’t be driven by headlines alone but informed by a broader view of economic indicators and market fundamentals. While some investors may be willing to pay a premium for properties in the sunbelt markets, others may find better yields in areas within the Northeast and Midwest regions that have affluent consumer bases.
Looking ahead, 2026 may bring continued volatility, but I don’t think that means it will be a down year. For disciplined investors, the path forward is rooted in fundamentals: understanding the interplay between interest rates and cap rates, evaluating tenant resilience and staying focused on long-term value creation.
Real estate is ultimately a long-term investment, and the strongest outcomes will come from owning assets that can perform across a range of market conditions. By approaching the year with clarity and adaptability, investors can navigate uncertainty and uncover meaningful opportunities for growth.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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