Hello and welcome to our annual Inside Real Estate webinar, where we provide our 2026 outlook on the commercial real estate markets for this year. My name is Erin Kerr. I lead Institutional Capital Raising for Principal Real Estate, and I'll be hosting our webinar for today. I'm very pleased to introduce to you my colleague Rich Hill, who is our Global Head of Research and Strategy here at Principal Real Estate. Before we dive into Rich's outlook for this year, please let me make and offer an introduction for Principal Real Estate.

We've been investing in private real estate for over 65 years, with more than 105 billion in assets under management. We are one of just a handful of real estate managers globally with long standing experience and a robust platform with investment solutions that span all four quadrants of real estate, public and private, debt and equity. Today, Rich will share the 2026 outlook and touch on areas of conviction and themes that our teams will be focusing on for this year.

I'd like to invite you to submit any questions that you have throughout the webinar using the Q&A box shown on your screen, and we'll plan to address those questions following our prepared remarks. Rich, with that, I'll hand it over to you, and look forward to hearing what you have to share with US today.

Thanks, Erin. And good morning to everyone that's joining US from the US. And good afternoon for those joining US from Europe. The title of our 2026 outlook was A Cycle of Selectivity. And the bottom line is we think a market defined by divergence is one that is ripe for alpha. So what I'd like to do is turn to the next page and start with a discussion of the economic backdrop that we're heading into in 2026.

If I was having this conversation with you in April, I would have been having a discussion that GDP growth had been revised significantly lower to around 1.4% in the United States. And frankly, if you would have asked me what 2026 held, I probably would have told you GDP growth was probably going to be closer to 1% than 1.5%. Lo and behold, what happened this year was a story of resilient growth. It's actually quite remarkable that we were so resilient in the face of inflation, geopolitics, trade tensions.

The market threw a lot at the global economy. But as I said before, the global economy was remarkably resilient. As the time of our writing of the US outlook, the global outlook, GDP growth in the United States had been revised higher from 1.4% in April to around 1.9%. And it's probably closer to 2% today. And as we look forward to 2026, GDP growth is probably going to be fairly similar, around 2%.

But this wasn't just a story of resiliency in the United States. We also saw resiliency in the Eurozone, where growth was revised 50 basis points higher to around 1.4%, and also in China, where growth was revised around 60 basis points higher to around 4.9%. So what drove this resiliency? We attribute it to three primary factors. First and foremost, inflation was not as bad as feared. Second, and I think this is a topic that maybe a lot of people haven't focused on. But the US tax bill in the United States was very stimulative. And in fact, the stimulative impacts of the US tax bill almost offset one for one the headwinds from inflation.

So what drove the rest of the growth? Well, it was AI and AI spending. AI spending had a significant impact on US growth in 2025. And we think that's going to continue into 2026. Obviously, there's a lot of discussions around AI right now, and some people might suggest it's a double edged sword. So we are playing a lot of close attention to it, but we think it's going to continue over the near term.

So moving to the next page, sometimes the headlines don't tell the entire story. And while the economy feels like it's on very strong footing from a headline perspective, we are cognizant of the fact that there's signs of a K-shaped economy emerging. The higher income cohort of the US population has been very strong, and in fact, their net worth continues to grow. But lower income cohorts are not growing nearly as fast. And you can start to see this beginning to emerge in things like student loan delinquency rates, auto loan delinquency rates, credit card delinquency rates.

It's signs that we're picking up on and maybe paying a little bit more attention to. That said, we think it is too early to call for recession. So moving on to the next slide. When we say it's too early to call for a recession, what we mean by that is the indicators that we're looking at. Some of them are accelerating, some of them are stable, and some of them are decelerating. So it is too early to call for recession. But the signals are not as clear as they used to be, which is exactly why we think the Fed cut interest rates in towards the end of 2025. We described this as an insurance cut, not a recession cut.

So let's move on and start talking about what this means for US commercial real estate, moving to the next page. We're fond of telling people, if this backdrop feels very uncertain to you, maybe the most uncertain that it's felt in your career, you're not imagining that. We are dealing with a whole host of factors that are outside of our control, that are converging together. So what do investors need to focus on in this uncertain backdrop? It's really simple to us. It's a back-to-basics investment approach where you focus on driving net operating income growth.

And net operating income growth is what we can control as real estate investors. How do you control that? Well, you focus on buying the right property types in the right markets. The good news for commercial real estate investors is net operating income growth is on really strong footing. If you look at almost every single property type, growth in 2024, 2025, and projections for 2026 are above long-term industry averages of around 2.5% or so.

On the left hand side of this chart, you're going to see a lot of alternative sectors, things like health care, data centers, manufactured housing. These are growing really fast. And it's an important point when you think about the US commercial real estate market, and frankly, the global commercial real estate market. A lot of people might refer to the commercial real estate market as an old economy asset class. That's actually not true. It's become a new economy asset class as new property types have emerged over the past 10 to 20 years.

And even sectors like office and storage that have lagged over the past couple of years are showing signs of inflection in 2026. So what that really means is this drawdown in commercial real estate valuations that we've seen over the past several years was not fundamentally driven. It was actually driven by a repricing of the right side of the balance sheet with higher interest rates. That gives us a lot of comfort that we are moving into the next stage of the cycle. So let's spend a little bit of time talking about what we're seeing and maybe how cycles play out. Let's move to the next page, please.

So when we think about recovery in commercial real estate, the central theme of our 2026 outlook is that a rising tide is lifting boats unevenly. Let me explain what that means. I'm often asked, is this going to be a V-shaped recovery like we've seen post the GFC? Is it going to be a U-shaped recovery, or is it going to be something else? We actually think it's going to be a K-shaped recovery. You heard me talk about the K-shaped recovery in the US economy, but we think that theme plays out in the United States, as well, for commercial real estate, and frankly, in Europe, as well, which I'll talk about in a little bit.

So what this chart is showing is the sense trough increase in unlevered property prices in the United States. Across almost every property type for the top 50 markets, you're seeing a wide range of recovery. But the top quartile of property types across top 50 markets are up more than 10% to 15%, and some markets are up even 20%. Other markets are lagging, though. We actually think that this is not a flaw of the cycle. It actually is the cycle itself.

A cycle of dispersion, as I mentioned at the outset, is what's going to drive alpha. So we're really excited about this market, because for the first time in a long time, we think being a back-to-basics investor, where property type and market selection and active asset management really matters. So moving to the next slide, let's talk through how cycles play out.

By all accounts, commercial real estate valuations are rising again. And I say by all accounts, because whether you look at unlevered valuations in the US, fund returns or listed REIT returns for the public markets, they all rose to various different degrees in the United States. The same thing can be said about Europe to maybe even a bigger degree. Unlevered property returns were up nearly 5% versus around 4% in the United States. Fund returns were up almost 4%, and the listed REIT market had a banner year, with USD basis returns up more than 25% and euro-denominated returns up around 10% or so.

So valuations are rising again. They've actually risen for around seven to eight consecutive quarters in the United States, or in Europe. Excuse me. And they've risen for six to seven consecutive quarters in the US. The worst is behind us, and we think that we're beginning to recover. I'm going to talk through this in a little bit, but we think don't think this is going to be a V-shaped recovery, as I mentioned previously.

Over the near term, it's going to be a recovery driven by income at the index level, with capital returns relatively muted. But we don't think the index is telling the whole story. We think there is actually significant alpha opportunities in the top cohort of markets where returns can easily outpace the index. But before we talk about that a little bit more, I want to speak through how cycles play out. So move to the next slide.

We're big believers that listed REITs are leading indicators in both downturns and recoveries. What happened in 2022 is that listed REITs had a really tough year. Total returns were down nearly 30%, even as private real estate valuations were rising. But fortunes reversed in 2023 and 2024, where listed REITS were rising, and private valuations were troughing. That's how cycles play out. Listed REITs trough first, private valuations trough second.

So it's not surprising to us that listed REITs troughed in October of 2023 and are up now more than almost 40% from that trough. It's also not surprising to US that private valuations troughed around 12 months later, and now have risen for almost two years in a row on a total return basis. But something actually really interesting happens in the commercial real estate market that we don't think the market pays enough attention to. Moving to the next slide.

What is that? Well, it's distress in the debt markets. Distress is a lagging indicator. Distress usually peaks out 12 to 24 months after private valuations trough. So the message I'm trying to deliver to you right now is that headlines are going to get worse before they get better. You're going to hear a lot of stories about distress rising. You're going to hear a lot of stories about delinquency rates rising. That's natural. That's what you typically see in cycles. And believe it or not, it's a contrarian bullish cycle, a bullish indicator.

So why is distress a leading indicator or a lagging indicator? It's because of the grieving process as we describe it. Banks do not like to resolve distressed loans into a distressed market. They like to resolve distressed loans into a stabilized market. That's where we think we are today. So my bottom line to you is this cycle, despite all the noise, is playing out in very much textbook fashion. And I like to tell people, if you can explain something, it makes it a little bit less scary. And if you can't explain it, it feels much more scary.

We think we can explain what has happened in this cycle, and that gives us comfort that we have turned into the recovery stage. Moving to the next slide. One of the factors that we think is a significant tailwind for the continued recovery in commercial real estate is the debt markets. The debt markets had a really constructive year in 2025. Lending conditions turned less tight. That doesn't mean they're loosening yet, but they return less tight. But loan demand actually turned positive in late 2025 for the first time in several years.

Why are lending standards important? Well, lending standards have a very strong directional correlation between year over year changes in unlevered property valuations. If you look at where lending standards are today, as defined by the senior loan officer opinion survey, it suggests that unlevered CRE valuation can continue to accelerate in the years to come. So follow the lending market. The lending market is showing that it is open and liquid in maybe a way that the headlines are not suggesting. That gives us a lot of comfort.

But let's turn to the next page and talk through some of the nuances of what's actually occurring. Before I talk through the nuances, I do want to be clear that we think returns in the United States are normalizing higher. How do we talk about-- how do we think through this? Well, on the chart on the left hand side, we're looking at annual unlevered 10 year total returns by decade. And you can see across decades, there's 10 year returns that are really high, well in excess of 10%, and there's returns that are not so high, less than 5%.

If you look at the 2010, the last 10 years have produced returns of just north of 5.5%. Not too great, but the bottom didn't fall out either. We think the next 10 years are going to be remarkably better than the last 10 years. Why is that the case? Well, it's for two reasons. First of all, when you're coming off a downturn like we've typically seen, the best returns occur in the aftermath of that. Again, we don't think this is going to be a V-shaped recovery. But there's another important point here.

While a low interest rate and falling inflation regime is good for commercial real estate on an absolute basis, it's actually not so great on a relative basis because it shifts money flows out the risk curve to things like tech stocks. We believe as the cycle turns back to a more normalized market with higher interest rates and higher inflation, commercial real estate can do very well in that environment. But I do want to make a point here. Often we're asked, well, in an early cycle environment, don't you want to move out the risk spectrum to opportunistic and value add funds?

We agree, but we think manager selection is very important, because even in the best vintages, there's still a wide range of returns as you move out the-- as you move out the risk spectrum. So this theme of manager selection is important. I talked to you about dispersion of returns across property types and markets, but we're also seeing a significant dispersion of returns across fund vehicles, which leads me to the next slide.

Single sector funds in Europe are outperforming. You can look at residential funds that are up 7.7%. Industrial is up 5.4%. Retail is up 4.8%. Multisector funds are up 3%. What this really tells us is exactly what the title was of our outlook, a cycle of selectivity. You really have to focus on picking the right property types in the right markets. But it's not just about the right property types and the right markets because you as an investor, you have to select funds.

Moving to the next page, I think, actually becomes-- it starts to tell an even more nuanced story. These are some of my favorite slides. On the left hand side, we're showing dispersion of returns across the NCREIF Odyssey Index. And we're showing dispersion of returns on the right hand side for the INREV, known as European Odyssey Index. Dispersion of returns have always existed, but the market forgot about dispersion of returns over the past 10 to 15 years, as a rising tide was lifting all boats to various different degrees. But we think it's actually going to become really important.

I think I mentioned to you maybe a few minutes ago that, while headline returns are inflecting higher, we don't think it tells the whole story about what's occurring underneath the surface once you lift the hood. Let me explain what that means. Odyssey one year returns were relatively muted at, call it, 3% or so. But the top quartile of funds generated returns of 5.7%. The second quartile was around 4.5%, and the third quartile was around 4%. The bottom quartile was actually only 30 basis points.

There's this wide dispersion of returns, and if you're picking the right funds, you can actually do substantially better than the index. That's not something that's unique to the United States, though. It's actually playing out in Europe, as well. So if you look at the last five years from 1Q '20 to 3Q '25, the 90th percentile of European Odyssey funds did 5% annualized returns. That's pretty good given the drawdown that we've seen.

The top quartile did around 2.4%, and it was substantially better than the median that only did 20 basis points. On the other hand, the 10th percentile was down 5%, and the lower quartile was down 3%. My only point to you is that this cycle of dispersion, this cycle of selectivity, it actually speaks to picking the right property types, the right markets, and even the right fund vehicles. I'm sure we're going to get some questions about what drives this, so I'm going to table that for a second. But let's move on to the next slide.

How are we thinking about playing this cycle? Well, first and foremost, I want to be very clear that we take a four-quadrant approach to managing real estate at Principal Asset Management. Erin talked about it, but I think it's a point that's really important. We're asked quite frequently, or I'm asked quite frequently, do you prefer equity versus debt, or private versus public? People laugh at me when I say this, but I reject the premise of the question. I think there is home for all of them in portfolios.

There are times in which you're supposed to be overweight, equity versus debt, and there's times in which you're supposed to be overweight, public versus private. But when you own all of them in your portfolio, it actually allows you to maximize your returns because they do different things at different points in the cycle. This is exactly what this quilt graph is showing you. In 2007, private real estate equity did very well, because it was at the top of the market. But in the ensuing years, it didn't do so well.

More recently, private real estate debt has done really well over the past several years. It was up 11% in 2000-- excuse me. It was up 5% in 2024. It was up 7% in 2025, year to date. You have to take a holistic approach to this, because different sectors of the real estate investing market do different things at different times. And we actually think it optimizes your portfolio when you take a holistic approach.

So I'm going to start to transition away from the theory and begin talking about what we actually like and why we like it. Turning to the next slide. As we look into 2026, we still are favoring debt over equity, even as we upgrade equity to an improving market. Let me explain why we like private debt. It's for two reasons. First of all, it's risk-adjusted returns, and secondly, it's volatility-adjusted returns.

I think risk-adjusted returns are pretty easy to understand. We are lending. The market is lending at relatively conservative LTVs on valuations that have already reset 20% lower. I'll explain this in a little bit more finer detail. If you have a 50% LTV loan, that means property valuations have to fall another 50%, 5-0 percent, before that loan takes a loss. Given that property valuations are already down 20%, that's a very draconian scenario that was far more severe than what we saw during the SNL crisis in the early 1990s, or post the great financial crisis.

We think private debt still offers a very attractive risk-adjusted return. But there's another point about private debt that we think is quite compelling that doesn't get enough attention. It's volatility-adjusted returns. The returns are actually really stable. There has never been a negative quarter of private real estate debt since the aggregate index that's produced by NCREIF and KREFC started in 2014, a pretty remarkable statement. It's like the little engine that could. It just keeps going, and going, and going.

We think that is a really important part of portfolios. And in fact, we're advising clients that are in private equity or private credit, traditional private equity and private credit, consider adding private CRE to your portfolio because it actually optimizes returns and leads to higher Sharpe ratios. Public debt, known as CMBS, we view as liquid private credit. We believe that you should have liquidity in your portfolios.

Private equity is increasingly interesting to us. As I talked to you previously, the indexes have turned positive and will continue to accelerate. But where we get really excited about the opportunity is selecting the right property types, the right markets, and the right vehicles. And I think if you do that, you can actually outpace the indices pretty significantly. Public REITs are becoming also really interesting. Point I'd give you as maybe a case in point, the first two weeks of 2026, listed REITs were the fourth best sector of the S&P 500.

They've given back some of those in 2000-- in this week as the market's been volatile given headline news. But my major point to you is, as the market becomes more conservative, less defensive, less focused on TMT stocks, we think public REITs can start to do well again, and the market is turning much more supportive. So in the final few moments, I want to talk through the various different property types.

I'm not going to spend a tremendous amount of time talking about the various different property types, because I think we're going to get a lot of questions about them, and it's probably best to talk through the property types as I answer your questions, rather than speaking at you. But let's turn quickly to the final slide.

On the left hand side, we're ranking the various different property types that we like, data centers, residential, at the very top of our list. And on the right hand side is Europe, with again, data centers and residential at the very top of our list. But I want to draw your attention to something we introduced in 2026. It's these property types referred to as selective conviction. It's things like industrial where we have some green and some yellow. It's retail where we have some green and some yellow. And it's even office in Europe where we have some red and some green.

Office in the US, we have yellow to red. These are really interesting sectors where we think that there's real opportunities to still invest, or there's opportunities that are beginning to emerge, like the office sector. I just want to give two quick examples about this. Let's talk about retail real estate, where I think it's a really easy example. Why do we have selective conviction on the retail real estate asset class, despite returns being strong, fundamentals being strong?

Well, there's 116,000 open air shopping centers across the United States. 116,000. That's a lot. The market likes to paint these with a broad brush, but when we do a detailed analysis of what's institutional quality as defined by what the US REITs own, we think the institutional cohort is actually only around 5% to 10% of those 116,000. So yes, we're bullish on retail real estate, just as much as anyone. We think core investors are too underweight to retail real estate. But it's not as though you can begin buying everything.

I think the office sector in Europe is another great example, where there is still some sectors that we're cautious on, but you're starting to see real demand and in parts of the office sector, like Paris CBD, or the West End of London. And frankly, I think these trends are even beginning to emerge in the United States, where, yes, maybe we're a little bit cautious on core equity in the office sector, but we think core lending could be really compelling, and value add and opportunistic strategies are beginning to present themselves. I want to conclude real quickly with a few final points. Let's move to the next slide.

We think selection will be the key to thriving in a recovery, but a divergent market. This is not a recovery like we saw in the GFC where everything worked. This is not the SNL crisis in the early 1990s. We think this is actually going back to what occurred in the late 1990s to the early 2000, where you had to be a back-to-basics investor, picking the right property types in the right markets. So final slide here. I'm going to turn it back to Erin in just a moment, but three key themes from us.

Structural shifts for redefining opportunities. Focus remains on sectors that benefit from strong secular tailwinds. And while themes matter, it requires hyper focus, and you need to have a disciplined approach to capital deployment, focusing on the right property types and the right markets. But one other theme is not getting enough attention. It's asset management. How do you drive NOI growth? Well, you manage properties really well. That is a theme that we think will become important. So I'm going to stop there. I'm going to turn it back to Erin. Look forward to your questions.

Rich, that was absolutely excellent. And no surprise, we've started to receive a number of questions and had even received quite a few in anticipation of this discussion. So I'll try to keep us organized and maybe keep with the conversation about product types. We've received a number of questions really hitting on the point of this discussion and the theme, I should say, for this year, which is the importance of selectivity in this cycle and what we're seeing in terms of dispersion of performance and property types.

And so data centers is an area that we're actively invested currently, and also by many investors, and it has clear tailwinds. There's demand across all tenants within the data center space, but notably from AI tenants. So can you comment on, are you bullish across all data center types? And also, please, if you can comment on the potential for an AI bubble within the data center space.

Yeah, thanks, Erin. I should acknowledge there was probably five BDA reports written about data centers and AI over the past 25 minutes I've been speaking. So look. If we were having this discussion three years ago, we would have been talking about two types of data centers, colocation and hyperscale. Co-location being multi-tenant data centers, and hyperscale being single-center data centers. We think the data center market is actually emerging-- is actually evolving in front of our eyes.

It's not about co-location, and it's not about hyperscale anymore. It's actually about three types of data centers. The first is cloud data centers. The second is AI inference data centers, and the third is generative AI data centers. These are big fancy research boards. So let me explain what these are as if I was talking to my mother. Cloud data centers are when you and I go on Google and surf the web, or buy something off of Amazon. We are using cloud.

That is not going away. It is a fabric of our everyday lives. AI inference is when you and I go on ChatGPT. I like to say-- I like to make fun of myself and say, someone goes on ChatGPT and says, I have no idea what Rich just said. Let me ask ChatGPT what this means. That is using AI inference data centers. But the third type of data centers are what we refer to as generative AI data centers. These are training models for future unknown AI demand.

I want to be very clear that we're cautious on generative AI data centers. That's where the vast majority of supply is coming right now. And there's a lot of speculative build occurring, because guess what. Hyperscalers are spending a lot of money. I'm a real estate person. I'd like to tell people that if you want to play AI, I think there's easier ways to play AI than generative AI data centers. That's not to suggest that there's not good opportunities there, but we think the opportunities are in cloud and AI inference data centers, because there is more demand than supply.

But let me unpack this a little bit more. We're developers in the United States. We're value add investors in Europe. But let me use the US as an example. Why do we like developing the United States? Well, first of all, we're developing what we refer to as power shifts. We find really attractive land close to major population centers, typically in availability zones, where there are clusters of data centers and clusters of clusters. And we either power that land, or that land is already powered.

Then we put a structure on top of it called a shell. We deliver that shell to a tenant that's already in hand before we start building, and then they put the technology into it. Effectively, we're unlocking the value of the powered shell through the land itself. We don't think the market recognizes how attractive that is and how risk averse it is, because it's really a unique strategy. The returns are pretty compelling. We think we can develop to a 20% unlevered IRR, give or take. That's a pretty attractive market.

Generative AI, maybe we would consider compiling land. Maybe we would consider powering land, but we wouldn't consider going vertical on it. We're much more focused on cloud and AI inference where there's more demand than supply. So that leads me to my final question, Erin, which I think is a good one. Is there a bubble? I don't think there's a bubble in data centers. Bubbles are not in a market where there is more demand than supply. That's where we're focused on AI. Excuse me, excuse me. Cloud and AI inference data centers.

If you want to ask where a bubble might be, and I don't know if there's a bubble or not. That's outside of my are of expertise, but I am watching. Maybe at some point the hyperscalers have downgrade pressure, and they spend less money. If they spend less money, that's not necessarily a bubble. That's just a deflation. So I like to tell people that in a market like this, everyone gets cheap money. That does not mean that it's not a very viable strategy over the medium to long term, but it also means that you have to be a lot more selective in this market and recognize not all data centers are created the same.

This isn't 2015 where you were riding a big secular tailwind. We think the big secular tailwind is still there, but you need to be more selective. We would ask you to focus on cloud and AI inference. We think developing is really interesting in the United States. We think value add is really interesting in Europe.

Maybe just addressing a question that just came in, Rich, and is one that I think we get often, so worth touching on is, how do you think about classifying data centers in a real estate bucket versus an infrastructure bucket?

Yeah. I'm actually really surprised by this question, and I don't think it's a loaded question whatsoever. First of all, we're very open to the idea that some investors consider it real estate. Some investors consider it infrastructure. I think there's some real reasons to consider it that it could be infrastructure, given long-term contractual leases, says. Basically, it is a utility. It's needed to power-- to provide data to all the things that we use. So I understand why it's infrastructure and I understand why it's real estate.

But my real interesting point here is we think there is a third asset class emerging that is neither real estate or infrastructure. Data centers sit at the very center of that. You actually need to understand both real estate and infrastructure to invest in a data center. And we think there are many other property types that are beginning to have a blurred line, as well. Why do I say that? Well, if you can't power a data center, you really don't have much.

So investors are increasingly focused on, how do you power a data center? And how does that unlock the value of your real estate? So we think a big theme going forward will be the infrastructure of real estate. Infrastructure. That's the intersection. Freudian slip. The intersection of real estate and infrastructure. We think this third asset class is going to become a big theme in the future.

Yeah, couldn't agree more. Thank you for addressing that. Maybe let's move to housing. That continues to be a theme we hear from investors that they'll focus on for '26 and probably for years to come, given the shortage that we see globally, and certainly in the US. But does Principal agree that housing broadly is an investable opportunity across the housing types, or are we favoring one versus another? And maybe if you can address the recent SFR headlines.

Yeah, so let me deal first with the SFR headlines. I would note that the White House put out an executive order on Tuesday night. I love when they do that when I'm traveling. No rest for the weary. But let's just talk about-- let's try to separate fact from fiction. There's a lot of focus on institutional involvement and single family rentals. Institutions only own somewhere between 2% and 5% of the single family rental market. I think that surprises a lot of people, and I often get a question, well, who owns the rest?

Well, I'm going to be-- I'm going to joke here. It's your rich uncle in Kentucky that owns three houses. The market's been dominated by so-called mom and pop investors for a very long time. In 2007, at the peak of the housing market, single family rentals were still 30% of the rentership market. That's before institutions really became involved with the housing market. So institutions are not that big in aggregate. They are bigger in some markets.

And I actually think this has a lot to do with what we're hearing with housing affordability. But the second point I would make to you is that institutions actually are not competing with individual investors. They haven't been buying off the MLS in quite some time. Because guess what. Houses are really expensive. It's expensive for institutional investors, as well. Everyone says, well, they're putting up all-cash offers. Maybe, but they're also not an emotional buyer.

When I buy a house, it's an emotional decision for my family. I'm not thinking about the return on economics when I buy a home. So what that really means is they haven't been buying homes off the MLS. And believe it or not, they've been better sellers of homes. They've been net sellers of homes over the past several years, not net buyers. So what have they been doing? Well, they've been building single family rentals and they've been partnering with home builders.

We think that's actually a really good thing because it increases the stock of housing, not limits it. So I think there's some misconceptions about this. I'm not going to get too much more on my soapbox here. But the real solution to housing affordability is building more of what we don't have, not regulating what we do have. And there's huge examples, whether it be Vancouver, Toronto, Berlin.

So what does that mean for the housing market? Erin, you brought up a really important question. Do we think the US market is under-housed? Yes, we do. Really smart think tanks will say it's 5 million homes, 6 million homes, 8 million homes. I don't what the right number is. We don't have enough houses in the United States. That is mathematically true, but it's actually not the real debate. The real debate is that we have a supply disconnect across markets.

In some markets, we have built too many homes of certain types, and in other markets, we haven't built enough homes of other types. I think there's a case to be made. In some markets, we might have an oversupply of conventional class A apartments and an undersupply of affordable rental housing in other markets. At the same time, a lot of the supply has come in the Sun Belt states, but it has not come in the Midwest and on the coasts.

You can't move a conventional class a apartment in Austin, Texas to Indianapolis, Indiana. That doesn't work. So what we really have is a housing mismatch across the United States. We think that is a really interesting opportunity to look at housing holistically. There are some markets where conventional class A is still really attractive. There are other markets where class B resilient housing is very interesting but housing is just not apartments. Rentership is just not apartments.

It's also things like manufactured housing. It's also things like single-family rental. It's also things like student housing, and even senior housing. We think a holistic approach to the housing market allows you to be nimble and pick your spots across markets. That's the way we are approaching it, and that's the way we think investors should approach it.

I'd like to hear your thoughts around office. We received a number of questions around all of the headlines that have recently been in the news and have been in the news for a while about office making a comeback. What are your thoughts about that sector and your outlook for this year in particular? Would you still consider it a risky investment at this point?

Yeah, so let's start with two facts. And I like to start with facts because I think it breaks down barriers. The first fact is from JLL. Around 90% of office vacancy in the United States is concentrated in 35% of buildings. Really remarkable statistic. What you're really saying is, we don't have an office problem in the United States. We have a class B and C office problem in the United States. We built too many offices over the past several decades, and we certainly built too many offices in the 1970s and 1980s, and we didn't put CapEx into them over time.

That's how a class A office becomes a class B and C office. We have too many class B and C offices, and the market's trying to figure out what to do with these, how you reinvent them. I don't think we have a class A problem, which leads me to my next point. The debt markets have become increasingly constructive on lending to office. I called it booming recently, which I think was maybe too strong. But in 2025, lending to the office market was back to historical standards. That's a really remarkable statement. The debt markets like office.

In fact, the commercial mortgage backed security market, the FASB market, was dominated by office debt in 2025, especially in New York City, but other markets, as well. The debt markets are open and liquid for high quality office because you're lending at conservative LTVs on well-positioned office properties. I think that is a leading indicator for office demand from investors. So how are we playing it? Well, we actually like getting our core exposure and lending to the office sector right now, because we think the risk adjusted returns are pretty attractive.

We're still a little bit cautious on buying core Equity Office, but let me explain why. It really has everything to do with CapEx. CapEx loads are really high, and it's a little bit uncertain how much money you have to spend to keep your office properties viable right now. In core equity, I'd rather miss the bottom and catch the upswing. That sounds like I'm a momentum investor. I'm not trying to be. I'm just trying to be pragmatic.

So on the equity side of the equation, what are we doing? In the United States, we think that there's emerging opportunities on the opportunistic and value add side to redevelop and reposition properties. The returns are attractive. If you want core exposure, I might look to Europe, where you can find really attractive opportunities and, like I mentioned, Paris CBD or the West End of London, and even some Asian markets where return to work has always been there. They're interesting, as well.

So we think you can start to craft an interesting office portfolio. The final point I would make about this, Erin, is, if you are a long-term investor, I think they're beginning to think really constructively about office. And I'm not talking about a 10 year investor. I'm talking about sovereign wealth funds and ultra high net worth individuals that have 25, 50, 100 year perspectives. They're beginning to step in and say the basis in these office properties are pretty attractive.

I don't know if valuations go up or down over the near term, but I think over the long term, I'd be willing to make a bet on San Francisco, for instance. I was in Chicago yesterday, and someone was saying, look, if I had long term permanent capital, I'd probably be making a bet on San Francisco. And I joked. I said, well, do you think you may have already missed the opportunity? And the response was, maybe, because it seems like San Francisco is a lot more vibrant and stable than it was just a couple years ago.

So hopefully, that's helpful, Erin. Really fascinating conversation. It's interesting to see how quickly sentiment is beginning to change.

Yeah, I'll be curious to see when this question comes in, call it mid-year or next year, just how different and probably more sought after the asset class could be at that point, or the property type. But you actually said, Rich, availability of debt for core mortgage and SASB debt picked up for office. And we received a question asking if you could unpack the difference in outlook between core mortgage lending and the SASB market, and what you expect for this year.

Yeah, sure. So if I'm thinking about the commercial mortgage-backed-- commercial mortgage-backed security market, I spent some time at the Commercial Real Estate Finance Council Conference early last week. I'm already getting my weeks mixed up. Yes, it in South Beach. Yes, it is nice to go to South Beach in January. I have learned in my old age that I can accomplish what I need to do in 24 hours of quick speed dating, rather than what used to be a five day trip.

I think the debt markets are going to continue to accelerate. And I heard something that was interesting at the Commercial Real Estate Finance Council Conference that I wasn't anticipating. I was expecting lenders to tell me that they were going to compete on volumes in 2026. What do I mean by compete on volumes? Well, spreads have come in. That's a healthy thing. Spreads have come in.

So I thought they were going to say, well, spreads have come in, but we can make just as much money because transaction volumes are up. There's a wall of maturities coming. That wall of maturity helps us refinance more debt. And while that's all true, I did hear lenders tell me that they're actually going to loosen standards, as well, maybe provide a little bit more proceeds, maybe more subordinated debt.

So I think the CMBS market is going to do really well. Why does the SASB market actually work and why does it thrive? It fills a hole that other lenders don't. SASB deals, by definition, are very big. They're hundreds of millions of dollars, and they can be into the billions of dollars, as well. There's not many lenders that can hold that on a balance sheet. In a prior life when I was on the sell side, I used to laugh and said, look, if insurance companies were willing to work together, they could compete with SASB. But insurance companies don't do a very good job of working together.

So there's not a natural home for a $300, $400, $500 million loan that goes into the SASB market. If you even remotely believe that M&A activity in large transaction volumes and portfolio sales are going to continue, like I do in 2026, the SASB market is going to be there. But I think you have to be a little bit more selective. Maybe the easy money has been made. Spreads are tight. You need to think about this on more of a risk-adjusted return basis than a total return basis.

Great response. So we've received quite a few questions relative to retail. You had noted in your, I think, final slide that we're bullish on retail, but that selectivity certainly matters. One of the questions we have here is we see malls reinventing themselves with other use cases, pickleball, roller rinks, different ways to replace the former retail tenants. Do you think this is paying off? And are malls potentially worth a new look amidst the opportunity set within retail?

Yeah, I always love a question about retail, and in particular, malls. For those that don't know, I grew up in a mall family. My dad was a mall manager. I like to tell people that means he managed malls for others. We did not own malls. But I do remember Jazzercise and food courts in the 1980s. I'm dating myself, but I have a sweet spot in my heart for malls.