The Real Estate Cycle: Where We Are and What It Means
February 21, 2026 | Author: David J. Murphy
The Four Phases
Commercial real estate moves through four generally recognized phases: recovery, expansion, hypersupply, and recession. JPMorgan Chase provides a useful overview of this framework (jpmorgan.com). During recovery, occupancy improves from its low point, but new construction remains limited and rental growth may be flat or below the rate of inflation. Expansion follows as demand strengthens, rents grow, and developers respond with new supply. Hypersupply occurs when construction outpaces absorption, vacancy rises, and rent growth slows or reverses. Recession is marked by falling occupancy, declining rents, and restricted capital flows. The full cycle has historically run roughly 10 to 18 years, though the length and shape vary by asset class and geography.
Current Positioning: Early Recovery
Based on the Q1 2026 RER Sentiment Index and other recent industry data, the commercial real estate market appears to be in the early-to-mid recovery phase. The indicators align with that reading. Asset values are stabilizing after a correction, debt markets are reopening, and sentiment is turning positive, but transaction volume remains below historical norms and price discovery is still incomplete.
Blackstone’s Global Head of Real Estate, Nadeem Meghji, described the current environment in a January 2026 commentary (blackstone.com) as follows: real estate values peaked in 2022 before declining 22% over the following two years. By early 2024, values began to stabilize, and as of early 2026, values remain only about 7% above their cyclical low. Blackstone noted that it has deployed $42 billion in equity since that stabilization began, positioning for a cyclical recovery.
CBRE’s 2026 outlook (cbre.com) projects that U.S. commercial real estate investment activity will increase by roughly 16% in 2026 to $562 billion, nearly matching the pre-pandemic annual average. CBRE expects cap rates for most property types to compress by 5 to 15 basis points, and notes that returns will be primarily income-driven rather than driven by financial leverage.
The Deloitte 2026 Commercial Real Estate Outlook (deloitte.com) scored its CRE outlook sentiment index at 65, above the 2023 low of 44 but just below last year’s score of 68. Sixty-five percent of Deloitte’s survey respondents expect conditions such as rental rates, leasing activity, vacancies, and cost of capital to improve through 2026.
Supply Dynamics
New construction starts have slowed across most sectors following the rate increases of 2022 and 2023, which should limit new supply coming to market over the next two to three years. That supply constraint, if demand holds, typically supports rent growth and asset appreciation as the cycle matures. CBRE notes that quality space will become more difficult to find in many asset types, particularly in prime locations, as the construction pipeline contracts.
Considerations for Investors
The PwC/ULI Emerging Trends in Real Estate 2026 report (pwc.com) found that industry leaders are, in aggregate, optimistic about U.S. buying opportunities. The 2026 buy rating of 3.74 marks a peak in the Emerging Trends Barometer score for the past 20 years. The report also shows scores above 3 (on a 5-point scale) for both holding and selling real estate in 2026.
The early recovery phase has historically presented a favorable entry point. Asset prices have corrected from prior peaks but have not yet fully reflected improving fundamentals. Debt is becoming more available and more competitively priced. Sellers who were unwilling to transact at post-correction pricing are beginning to accept current market levels, which is gradually increasing deal flow.
That said, this cycle carries distinct risks. Tariff policy and interest-rate uncertainty make it difficult to underwrite exit assumptions with confidence. The performance gap between asset classes is wide. Data centers and industrial are firmly in expansion territory, while parts of the office market may still be in recession. Geography matters as much as sector. A blanket recommendation would oversimplify a market that is recovering at different speeds depending on property type, location, and quality.
The general framework that many institutional investors apply in this phase is to focus acquisitions on sectors and markets with favorable supply-demand dynamics, use conservative leverage, and build in realistic hold-period assumptions. Sellers holding well-located assets in favored sectors may benefit from patience, as pricing is likely to improve as the recovery broadens. Sellers holding assets with structural challenges, such as commodity office or oversupplied multifamily in certain markets, may find that current conditions offer a reasonable exit before further differentiation in pricing.
This commentary is not investment advice, and individual portfolio decisions depend on factors beyond any single sentiment survey or market report. The data does suggest that the market is moving from correction into recovery. The sources cited above offer more detailed analysis for those interested in exploring specific sectors or strategies.
David J. Murphy is the managing attorney at Murphy PC in Boston, Massachusetts. He regularly represents real estate developers and investors in real estate development projects.