Welcome to Inside Real Estate Today. My name is Rich Hill. I'm Global Head of Real Estate Strategy and Research at Principal Asset Management.

In this month's edition of Inside Real Estate Today, we're digging into three key data points that support the resiliency of the U.S. commercial real estate market in the second quarter of 2025. What are those data points? First, the performance of U.S. commercial real estate funds; second, transaction volumes; and third, the U.S. commercial real estate debt markets.

The National Council of Real Estate Investment Fiduciaries published its 2Q25 results for the Odyssey index in July. As a quick review, the Odyssey index tracks 25 open-ended funds that own core commercial real estate. It's a widely followed benchmark.

The index posted total returns of a little bit more than 1% That was entirely driven by income returns, as capital returns were muted. This helps to reinforce our views that the U.S. commercial real estate market can generate plus or minus 5% total returns in the year ahead.

While volatility has undeniably increased over the past several months, we think the U.S. commercial real estate market is still on stronger footing than it has been at any time over the past three years. MSCI Real Capital Analytics reported that 2Q25 transaction volumes rose 7% year-over-year and first-half 2025 transaction volumes now stand 13% higher than they did over the prior year. We think this is undeniably better than what people were expecting in early April, post-Liberation Day. But we do have some questions if the full impacts of tariffs have been felt.

Indeed, there was a decline in June relative to the prior year. But we do note that June transaction volumes were still the highest year-over-year. One of the mitigants to declining transaction volumes because of tariffs may be the new tax bill, which was undeniably a positive for commercial real estate.

Finally, we think a key reason U.S. commercial real estate property prices continue to increase and transaction volumes are rising is the stability of the CRE debt markets that remain open and liquid. Indeed, the Mortgage Bankers Association recently published their 2Q25 survey of originations. It showed U.S. commercial real estate originations were up 48% in the second quarter of this year compared to the same period last year. And first-half originations were up 66%. In fact, the index stands at a level that's 50% above the long-term index average. Every single lender type except CMBS rose quarter-over-quarter, with CRE debt funds leading the way.

Additionally, the Senior Loan Officer Opinion Survey, which is a quarterly survey published by the Fed, showed that lending standards tightened slightly and loan demand declined slightly. However, the devil's in the details. Large banks actually eased standards and saw greater loan demand, while small banks saw the exact opposite. Importantly, standards remain much looser than a year ago, and demand much improved.

We continue to see room for improvement in the CRE debt markets, as evidenced by CREFC's Sentiment Indicator. As a review, in 1Q25, it had its largest drop ever. But we saw a significant rebound back into positive territory in the second quarter of this year, suggesting that the debt markets are seeing a more favorable outlook going forward.