Welcome to the latest edition of Inside Real Estate Today. My name is Rich Hill. I'm Global Head of Real Estate Strategy and Research at Principal Asset Management. Today, we're digging into key themes from our 2026 global real estate outlook. The title of our outlook is A Cycle for Selectivity, as a rising tide does not lift all boats to the same degree.

2025 was a year that tested the global economy, but it will likely be remembered for its resiliency. Trade tensions deepened, inflationary pressures persisted, and global fractures widened. However, growth persisted. By year end, GDP growth forecast in the US, the Eurozone and China were higher than they were in April.

The global commercial real estate market was also resilient. After two years of downturns, we now are in a recovery stage. This is driven by stable net operating income growth for most property types, a lending market that is open and operating, transaction volumes that are beginning to widen. Yet distress, a lagging indicator, is still rising. We think this cycle is playing out in textbook fashion.

The listed REIT market, which is a leading indicator, has rebounded more than 35% from its 2023 trough. Commercial real estate valuations in the United States have now risen for five consecutive quarters, and they've risen for six consecutive quarters in Europe. However, distress, as we mentioned previously, is still rising, and we expect delinquency rates to continue to rise.

Beneath the surface, returns are diverging sharply across property types, markets and even fund strategies. This isn't a flaw of the cycle. It is the cycle. Investors are no longer confronting a downturn, but rather navigating dispersion. Against this backdrop, we think the market should take a page from the equity playbook where property type and market selection matter. Over the prior cycle, historically low interest rates and financial engineering drove returns. But over the next cycle, we think fundamentals and asset management will be the primary driver.

Net operating income will be the primary source of alpha against a world where we can no longer expect cap rate compression. Themes still matter, but they require hyper selectivity. At Principal Asset Management, we take a four-quadrant approach to managing real estate, equity versus debt, and public versus private. In our 2026 outlook, we continue to favor debt over equity. Why? While lending spreads have compressed, we still see an ample opportunity to originate loans, given a wave of maturities over the next several years, coupled with accelerating transaction volumes.

At the same time, conservative LTVs on property prices that have already reset create attractive risk adjusted returns. We also upgraded our outlook for private equity real estate. Many properties are trading below their replacement costs. Net operating income growth remains above historical averages. And as I mentioned previously, the debt markets are open and operating for business. However, this will not be a V-shaped recovery. Instead, it will be one where manager differentiation matters.

So what property types do we like? Well, we continue to data centers, but we're focused on AI and cloud data centers versus generative AI data centers. We also like housing, but we sort of disagree with the view that we have a shortage of housing. While that's true, we actually think we have a housing mismatch, making market selection and property type very important. Finally, logistics, everyone's favorite sector over the past several years. We're really focused on modern logistics facilities.