Hi. I'm Rich Hill. Welcome to the first edition of Inside Real Estate Today. The first major factor is that commercial real estate valuations have already set 20% lower from their peak. This usually doesn't occur when the economy is on a strong footing. So absent that, what are the other factors that we're looking at?

First of all, net operating income growth is expected to remain on relatively strong footing. Why is that the case? Well, guess what. Commercial real estate is relatively insulated from the direct impacts of tariffs, and the long-term contractual nature of commercial real estate leases makes cash flow more durable.

The second point I would note is that balance sheets are on really strong footing, unlike the global financial crisis and the S&L crisis of the early 1990s. REITs have loan to values of around 35%. And open-ended funds that own core commercial real estate are even lower.

Our base case is that commercial real estate total returns muddle along in the year ahead, so call that around 5% total returns. We think income returns will help to mitigate the risk that capital returns are flat to maybe slightly negative. This might seem bullish relative to the developments that have occurred over the past month or so, but keep in mind it wasn't too long ago that people were expecting a much stronger recovery in commercial real estate because usually the best returns occur in the aftermath of environments where property valuations draw down 20% or more.

Our bear case calls for total returns declining around negative 10% or so. That seems like maybe not too much given the backdrop that's occurred. But keep in mind that would lead capital returns to fall more than 30%, which is sort of in line with where they troft out during the great financial crisis and the savings and loan crisis. At the risk of whistling past the graveyard, we don't think this environment is nearly as severe as those two prior downturns because we're not dealing with the commercial real estate credit crisis.

Our bull case for the year ahead calls for total returns in the high single-digit range as tariff tension deescalates. Why do we think this is reasonable? Well, if you look at the long-term average annualized return for commercial real estate, it's in the 9% to 10% range. So if things normalize, why can't we go back to the historical average?

While every cycle is different, there is a precedent for commercial real estate to outperform, even as the U.S. economy goes into recession and risk assets pull back. So for longer-term investors, we see this as an attractive opportunity to invest in commercial real estate, especially as valuations have already pulled back 20%.