CRE recovery intact but increasingly uneven – Principal AM

The recovery in Commercial Real Estate (CRE) is ongoing but increasingly varied, according to Rich Hill, global head of Research & Strategy at Principal Asset Management.

Rich Hill

While overall indicators like rising private valuations, increased transactions, and debt access suggest a healthy recovery, a closer look reveals significant differences in performance across the sector.

The NCREIF Property Index (NPI) showed a modest 4.9% year-over-year return in Q1 2026. However, the gap between the best and worst performing properties widened to 144 basis points, indicating strong gains in some retail markets while certain office segments continue to decline.

Unlike previous cycles where falling cap rates boosted all asset values, the current market offers limited room for further cap rate compression. This means Net Operating Income (NOI) growth, driven by factors like rent growth, occupancy, and operational efficiency, will be the main determinant of returns.

Investors will need to be more selective, focusing on specific properties and markets, and executing strong operational strategies to achieve alpha, rather than relying on broad market trends.

“For investors, this marks a shift. The recovery is real, but it is not uniform. In a more fragmented market, outcomes depend less on broad market tailwinds and more on disciplined selection and operational execution,” concluded Rich Hill.