As we look ahead to our 2026 outlook, we think selectivity will be key in a market that's showing clear signs of recovery but also dispersion across property types, markets, and funds.

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The short answer is selectivity. While the headline indices are showing clear signs of a market in recovery, when you lift the hood, there is significant dispersion across property types, markets, and even funds. This isn't a flaw of the recovery, it is the recovery. So just as equity investors pick the right stocks and the right sectors, so too should commercial real estate investors focus on picking the right property types and the right markets.

We think this cycle is playing out in textbook fashion. And by all traditional measures, the cycle has moved into the recovery stage. What does that mean? Well, listed REITs are a leading indicator and trough first. They are up more than 35% from their trough in October of 2023.

Private valuations trough second. Private valuations in the United States have risen for five consecutive quarters and six quarters in Europe. But, distress in the CRE debt markets, as measured by delinquency rates, are a lagging indicator and have not yet peaked out.

I want to underscore to start that we think all four quadrants have a home in portfolios-- public and private, and equity and debt. We continue to favor commercial real estate debt, given its attractive risk-adjusted and volatility-adjusted returns. However, we think private equity is in the early innings of a long cycle recovery. Within REITs, we think they have a 10% to 30% allocation within private portfolios. And commercial mortgage-backed securities? Well, they're a liquid alternative to private credit.

We think themes still matter, but they require a laser-like focus. Two examples-- the housing market and data centers. In the housing market, there's a narrative that the U.S. is under-housed by five to six million homes. And while this is technically true, we actually think it's a story of a mismatch of housing. We've built too many homes of certain types in some markets and not enough homes in other types in other markets. As a result, we think you need to look at the housing market holistically.

With data centers, a sector that the market usually thinks of as relatively generic, we think there are three types of data centers. We're constructive on cloud and AI inference data centers where there's more demand than supply. But we're much more cautious on generative AI data centers that we think are more speculative.