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 the recovery and U.S. commercial real estate.

First, what are the four headline CRE indices telling us? Secondly, dispersion across property types, markets, and funds. And then third, the recovery in commercial real estate relative to the housing market. The four headline CRE indices are telling a story that the market has clearly moved into the recovery stage of the cycle. All four indices are up relative to their trough by 3 to 5 percentage points, and 3 out of the 4 indices are up on a year-over-year basis.

We look to the Green Street index as a leading indicator, and the NCREIF Property Index as a lagging indicator, given that it's an appraisal based. The CoStar index is the only index that is not up on a year-over-year basis, and it has had a bumpy recovery. But we think that is because it has had the greatest recovery in the prior cycle, trough to peak of 175%, whereas the other indices were up less than 150%. It therefore stands to reason that the CoStar index would fall more and have a more uneven recovery.

We previously argued that this cycle would reward fundamentals rather than financial engineering. This means picking the right property types, and the right markets will drive outperformance. We're seeing this play out live time right now. While the headline indices were only up 3% to 5% from their trough, we're seeing significant dispersion across property types, markets, and funds.

Case in point, when you look at the top 50 markets across property types, the top quartile is up more than 10% from their trough, and some are up 15% to 20%. However, the bottom quartile is still lagging. We're also seeing this play out in funds. While the NCREIF-ODCE index, which tracks 25 open-ended funds that own core commercial real estate in the U.S., was up less than 1%, dispersion stood at 200 basis points, which is close to historical highs. We can see this play out even better when we look at trailing one-year returns. The top quartile of funds are up nearly 6%, while the bottom quartile funds are only up around 30 basis points.

Finally, how does the recovery in the commercial real estate market compare to its close cousin, the residential housing market? Residential housing prices nationwide slipped nearly 1% in 3Q25, bringing year-over-year changes to just 1.3%, compared to nearly 5% for the commercial real estate market on a total return basis. I'm emphasizing total returns in commercial real estate and prices in the housing market, because we think the income component of commercial real estate is extremely important to total returns, and frankly, undervalued.

What's less talked about is dispersion in the housing market. Just as we're seeing dispersion in the upside for the commercial real estate market, we're seeing dispersion to the downside for the housing market. What does this mean? Well, if you're looking at the top 100 markets, 60% of them are still rising, but 40% of them are now declining. The weakness is occurring in previously high-growth markets in the South, the Southwest, and the West. By comparison, the Northeast and the Midwest are still rising and quite strong.