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. This, month we're digging into how long CRE cycles last. While consensus believes they may last around 10 years, our analysis suggests they last much longer, driven by underappreciated income.

As a quick review, in our 2026 Global CRE Outlook, we argued that the commercial real estate cycle has moved into recovery by nearly all traditional measures. The listed REIT market, which is a leading indicator in both downturns and recoveries, now stands 45% higher on a total return basis compared to its October 2023 trough. Private valuations usually trough 12 to 18 months later, and it's therefore not surprising that total returns in the United States have risen for six consecutive quarters.

However, distress in the debt markets is a lagging indicator. The headlines are likely going to get worse before they get better, with delinquencies continuing to rise. Distress is a lagging indicator because it's the final stage of the grieving process-- acceptance. So what does this mean for the recovery? We don't expect it to be a V-shaped recovery, given there will not be monetary stimulus driving interest rates lower.

Instead, we expect the normal and gradual recovery in valuations. This might mean that the headline reads as if it's a U-shaped recovery, but in fact, we think it's closer to a K-shaped recovery, given significant dispersion in returns across property types, markets, and even fund vehicles. Consensus expectations for the recovery over the next several years suggest this is indeed playing out, with income returns driving the majority of total returns and capital returns not beginning to meaningfully increase until late 2026 and into 2027.

Not surprisingly, most of the attention has centered around what property types and what markets will maximize net operating income growth. NOI growth drives income returns and it drives capital returns in a market where there will not be significant cap rate compression. However, another question has emerged. How long do CRE cycles last? Grounded in the Homer Hoyt academic framework, we believe that cycles last, on average, 18 years. They transition through recovery, expansion, and then downturn.

We analyzed the public-listed REIT market and the private market. There have been three distinct cycles in the public market that lasted, on average, 16 years, and there's been two cycles in the private market where cycles also lasted around 16 years. Expansions of 11 to 12 years are significantly longer than recoveries of around two years and downturns of around one and a half years.

This cycle is unfolding against an unusual backdrop. While CRE valuations have reset meaningfully lower over the past two to three years, many other risk assets still sit at valuations close to their all-time highs. We think this disconnect raises valid concerns. However, historical precedent suggests CRE can outperform even if the broader markets begin to pull back. What's occurred in early 2026 is exactly representative of that.

US-listed REITs returned 10.5% through the first two months of the year, which was their second best start to the year in decades. Furthermore, February returns of 7.5% were the best February on record, even as AI concerns intensified. Why are US-listed REITs outperforming? Well, earnings predictability, driven by contractual long-term leases, are becoming valuable again.