The 2026 Economic Outlook: Muted Growth, Cautious Activity—But Likely No Recession

Barchart·12/12/2025 10:32:16

The state of the economy as of late 2025 could be described as mixed.

“Heading into 2025, I was concerned that the uncertainty around the new administration’s policies would cause more headline slowing in the economy than what we’ve seen,” commented John Beurerlein, chief economist at Pohlad Companies, the parent company of Northmarq. “The headline numbers have held up, while consumer spending continues to be supportive.”

At the same time, “the stronger spending has mainly been coming from the higher-income sector of the economy,” Beurerlein said. “The lower- and middle-income sectors have become increasingly strained as prices are elevated and the labor market has been cooling – a reflection of uncertainty at the corporate level.”

Or, as Chandon Economics’ Vice President Jonathan O’Kane pointed out: “If you strip out the outsized contribution from the highest-income households and the market capitalization gains concentrated in the Magnificent Seven (mega-tech cap stocks) and AI-aligned firms, the underlying economy in 2025 often felt recessionary.”

Will the current trend continue in 2026? Whether yes or no, how will that impact the commercial real estate market? In response to these questions, economists told Connect CRE that a fiscal crash is unlikely, although growth is expected to be slow. As for commercial real estate, “there is an overall sense of optimism,” said Ryan Severino, BGO’s Chief Economist and Head of Research: “we’re not out over our skis, but people are feeling better about the sector than they have in years.”

Looking Back: Trade, Tariffs and Interest Rates

Forecasting 2026 requires an understanding of 2025. In this regard, the economists were unanimous in their view that tariffs had the largest impact on the economy.

 And, by extension, commercial real estate. “Early April’s ‘Liberation Day’ announcement of major adjustments in U.S. tariff policies disrupted global trade activity, while the constant revision of tariff targets led to a spike in economic uncertainty,” commented Greg Willett, LeaseLock’s Chief Economist.

That uncertainty, in turn, impacted most commercial real estate sectors. Moody’s Senior Economist Ermengarde Jabir explained that tariffs and trade wars have boosted operating costs across the industrial and retail sectors. Furthermore, the confusion and tariff whiplash affected corporate decisions regarding space. “They’re leaning more towards continued downsizing rather than expansion,” Jabir said.

On the other hand, “rental housing demand surpassed expected levels during the first half of 2025,” Willett said. Still, when job creation softened, household formation fell. Additionally, foreign-born renters disappeared. Said Willett: “rent-growth momentum that had emerged in early 2025 reversed in the second half of the year.”

Nor was the Federal Reserve immune to trade policies or the resulting sticky inflation. The ongoing elevated Effective Federal Funds Rate (EFFR) exerted pressure on commercial real estate’s capital markets. It’s true that the interest rates weren’t that high from a historical viewpoint. However, “They’ve been higher over the past two and a half years than they were for the preceding 15 years,” Jabir said.

The high rates, in conjunction with an upcoming debt maturity wall of $1 trillion, have “meant ongoing pressure and concern for CRE owners and lenders,” she added.

So, between tariffs and interest rates, “the market spent much of the year assuming rate relief or a growth rebound that never quite materialized,” O’Kane observed. “The macro backdrop didn’t deteriorate enough to force a crisis, but it remained challenging enough to weigh down valuations, deal flow and development pipelines.”

Still, the market ultimately incorporated the higher costs of capital into pricing expectations, while investors gradually moved off the sidelines. O’Kane pointed out that while investment activity didn’t fully rebound, “the psychological reset helped what had been a multi-year freeze.”

Furthermore, according to economist Ray Perryman, founder and CEO of The Perryman Group, most real estate asset types remained steadier than analysts had predicted. “Even with all the uncertainty in the economy, overall vacancies held relatively stable for most segments,” he added.

Soft Landing, Recession or More of the Same?

The economists agreed that there probably won’t be a 2026 recession to worry about. O’Kane puts the likelihood of a recession at about 40%, while Jabir explained that “during the period of monetary policy easing over the past 15 months, the (EFFR) rate has fallen 175 bps.” That drop could encourage business expansion and maintenance of healthier employment levels.

Perryman forecasts that the pace of economic expansion could increase in the second half of the year, with the GDP expanding by around 2.5%. Severino agreed, predicting an expansion in consumption. “GDP should also benefit from the massive amounts of capital being invested in data centers,” he said.

Beuerlein’s outlook is for “continued slow growth as long as the labor market does not become substantially weaker” with “a near-jobless expansion to persist.” Willett commented that his base-case scenario suggests employment growth at a pace of approximately 50,000 jobs per month, a break-even point necessary to maintain a steady unemployment rate.

However, optimism may not hold up if the job market continues to weaken, prices continue to rise, and sectors like artificial intelligence lose equity funding. Additionally, “Immigration restrictions and an aging population will be limiting factors for economic growth,” according to Beuerlein. Added O’Kane: “Resilience remains the economy’s defining feature, but that resilience shouldn’t be confused for invulnerability. 2026 will depend heavily on whether the middle of the income distribution stabilizes — or continues to erode.”

So, What’s Next for CRE?

The economic outlook will, understandably, affect CRE and its decision-makers. Here’s how it could play out over the sectors.

Retail Remains Steady

Retail is expected to continue its forward momentum as long as consumer spending remains constant. Severino said that continued low vacancy rates are expected to persist despite low supply. “Retail quietly had the best returns of the major property types over the last year,” he said. “That could likely continue or at least do better than many expect.”

Multifamily: More Opportunities

Willett acknowledged that getting individual multifamily deals to the closing table will remain difficult. On the other hand, supply is continuing to drop while “the age of much of today’s inventory means there’s significant opportunity for reinvestment to extend property lifespans.”

At the same time, housing affordability could continue to be an issue as interest rates decline. “The premium to buy versus rent has never been higher, and the modest decline in mortgage interest rates that is anticipated ahead won’t dramatically change the math,” Willett said.

Industrial: An Iffy Outlook

O’Kane views the industrial sector as a relative outperformer in 2026. The massive construction of the early 2020s is in the rearview mirror, resulting in a more balanced supply/demand picture in the year ahead. “The sector continues to benefit from multi-year structural tailwinds: re-shoring, near-shoring, the post–trade-war restructuring of supply chains, and the ongoing demand for modern logistics space,” O’Kane said.

But Severino wasn’t quite as optimistic. “People are falling in love with manufacturing as a subsector of industrial,” he commented. “But manufacturing output, construction of manufacturing buildings and construction employment are all falling, contrary to what many think.”

Office: Opposite Issues

Despite return-to-work mandates, the office sector continues to struggle. Perryman explained that it will take time for office dislocations to subside, while older, poorly located spaces will experience weaker demand. Meanwhile, “the professional and business services industry group, which utilizes a large percentage of office space, has been seeing uneven performance, while widely publicized layoffs are also affecting the need for space,” he said.

On the other hand, Severino pointed out that the office sector is quietly recovering—and will likely continue to do so—”in a way that people probably aren’t paying enough attention to.”

Capital: Ongoing Enhancement

Severino stated that the capital markets should experience improvements in pricing and volume. At the same time, “development and construction, outside of a few pockets like data centers, is slowing down due to higher input and financing costs,” he said.

Meanwhile, O’Kane pointed out that the decline of the U.S. dollar means that “global investors are likely to show renewed interest in U.S. CRE—especially in the most liquid coastal markets where underwriting is straightforward, and exit risk is lower.” Domestically, higher structural inflation and widening fiscal deficits are keeping long-term Treasury yields elevated. Look for a “cautious pick-up in transaction volume,” and a development pipeline revival, O’Kane said.

The Takeaway

Moody’s Jabir suggested that investors, developers, and owners preparing for 2026 should consider asset types and geographic locations that offer long-term demographic growth prospects. “Also under consideration should be long-term use cases catering to consumer staples, including food-related properties, like grocery-anchored retail,” she added.

But O’Kane sounded a note of caution, pointing out that the industry should pay attention to the increasing risk associated with America’s deteriorating fiscal position. “Neither political party has shown real urgency in addressing the structural deficit, and markets have begun to openly discuss the possibility that today’s higher borrowing costs may be less cyclical and more permanent,” he said.

So, while a fiscal crisis isn’t in the near-term outlook, “CRE is uniquely exposed because long-term rates and global capital flows are central to how our sector functions,” O’Kane added.

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