After two years of declining values and a largely stagnant 2025, the global real estate market is entering a more promising phase. Morgan Stanley Investment Management expects 2026 to mark an inflection point, with a recovery in both valuations and transaction activity.
The macro backdrop remains constructive—and divergent, requiring a diversified and granular investing approach from investors. Beyond U.S. growth opportunities supported by demographics and productivity gains, Morgan Stanley Real Estate Investing (MSREI) is seeing increasingly attractive opportunities in Japan, driven by reflation and corporate reforms, and in Europe, boosted by stimulus and defense spending.
At the same time, new construction has slowed and, in many markets, it now costs more to build a property than to buy an existing one. Because this makes new projects harder to justify financially, it is likely to limit future supply and potentially lengthen the next phase of the real estate cycle.
“Lower cost of capital, lower prices and constrained supply are creating favorable conditions for recovery,” says Tony Charles, Head of Research and Strategy for Global Real Assets at Morgan Stanley Investment Management. “That said, performance will vary across regions, sectors and asset types. Motivated sellers, engaged buyers and improved debt availability are setting the stage for a rebound in both transactions and valuations.”
Volatility Persists Amid Shifting Risks
Even though real estate fundamentals are improving, markets may still be unsettled. Rising geopolitical tensions and ongoing conflicts are adding uncertainty to the global economic outlook. As such, investors may need to be more selective—evaluating opportunities by location and by individual property type rather than relying on broad market trends.
In this environment, a heightened focus on active asset management will be critical to driving a metric known as net operating income growth—a key driver of long-term performance in real estate investments.
“The balance of risks and opportunities in real estate is shifting,” Charles notes. “While macro policy uncertainty is easing, geopolitical risks are becoming more prominent and more volatile. At the same time, the effects of fiscal, monetary, trade and regulatory policy—particularly in the U.S.—should support more predictable occupier behavior and pockets of strengthening demand.”
Capital Markets Provide Support
Capital markets, although a bit more volatile today, are also playing a key role in the sector’s recovery. As confidence improves among investors, lenders and borrowers, more transactions are moving forward because debt financing is generally easier to obtain—and more favorable financing terms, in many cases, are helping to boost expected returns for investors.
Institutional investors are raising more capital, while fewer are waiting to withdraw funds. Real estate is also starting to look more attractive compared with other asset classes, and more investors believe the market may have reached its low point in this cycle—both of which are helping renew interest in the sector.
“Owners who have delayed sales are increasingly facing liquidity needs and maturing debt,” Charles says. “At the same time, buyers can acquire assets at 20%–25% below peak values, often below replacement cost, while accessing more attractive financing.”
Sector Views: Where Opportunities Are Emerging
MSREI is closely monitoring several key sectors in real estate:
Industrial: The sector is being reshaped by supply-chain realignment, such as the shift of manufacturing from China to other countries and the desire for diversification given the rising frequency of external shocks. In the U.S., supply of industrial real estate space is expected to decline over the next several years as high construction costs and lower rents limit new development. Globally, performance is likely to diverge, with strength concentrated in markets tied to advanced manufacturing, technology and defense. Demand is expected to favor logistics facilities that support automation and electrification.
Residential: The for-rent sector continues to benefit from constrained home affordability and limited supply. Performance is increasingly influenced by domestic migration patterns, job growth dynamics and different housing regulations. Student housing remains attractive, particularly for high-quality assets near leading universities. Despite compelling fundamentals in most markets, regulatory risks continue to be high in many markets.
Office: While return-to-office trends have begun to stabilize, the recovery remains uneven. Select U.S. markets are seeing improved sentiment, and high-quality Class-A properties are achieving record rents. However, the sector continues to face headwinds, including elevated capital expenditure requirements, ESG-related upgrades, moderating job growth and uncertainty around the long-term impact of artificial intelligence on office demand.
Retail: Performance is resilient, particularly in markets with strong employment and dense populations. Overall, limited new development and a shortage of high-quality space are supporting occupancy and underpinning rent growth.
Hospitality: Long-term trends remain largely favorable for hotels. The decline in business travel is being partly offset by the fact that millennials—the largest age cohort in many countries—prioritize travel and experiences over consumption of goods.
Healthcare: Fundamentals vary by subsector. Senior housing continues to be strong, driven by limited supply and a fast-growing population aged 75 and up. It also benefits from the fact that in the U.S., baby boomers often help pay for senior living by tapping wealth from home and equity appreciation. Medical office properties are supported by rising healthcare spending and a shift toward healthcare services being delivered in outpatient clinics and physician offices, rather than hospitals. By contrast, life science faces near-term challenges from weak demand and oversupply of lab space due to reduced activity from early-stage venture-backed firms, as well as government funding uncertainty and larger public biotech companies slowing expansion and subleasing excess space.
Self-Storage: Demand has slowed due to high mortgage rates, slower home sales and broader affordability pressures. However, improving housing market activity and limited new supply could support a recovery over the medium term.
Net Lease: These assets offer stable income streams, as tenants typically assume variable property-level costs such as taxes, insurance and maintenance. The sector is relatively insulated from both slowing economic growth and rising inflation, though careful evaluation of tenant credit and asset quality remains essential.
Data Centers: Demand and investor interest remains exceptionally strong, driven by unprecedented investment from major technology companies. Limited supply is supporting fundamentals, with expansion accelerating beyond the U.S. into Europe and Asia.
