Well, here is yet another year under our belts in the real estate industry.  Much has happened; however, I will refrain from a review of last year since I assume you have been inundated with daily reports of everything going on and I will add little if anything to a reviewing of last year.  This article is about next year.

To that end, notwithstanding that it is: “difficult to make predictions, especially about the future” here are some thoughts where I think things are headed, all of which center around my suggestion for the real estate industry to adopt the mantra; namely, my phrase: Be Overpaid For Risk.

Before I discuss my predictions for 2026, I have a few general thoughts and suggestions for the real estate industry – and yes some of this was said last year, but if I am repeating any of it, then I believe it to be true stronger than ever.

Interest Rates & Inflation: I suggest that the real estate world should end its myopia that future predictions of interest rates matter so much.  Yes, interest rates do partially dictate the current pricing of a real estate asset; however, in my view, attempting to predict the future of interest rates is not a worthwhile pastime.  Sorry if this is too outspoken, but if a real estate business’s upside is based on its success in predicting future interest rates, then the chances that it will succeed over a long-term basis are quite low.  It is really just a version of market timing.  Warren Buffett has famously said that he would not make a single different investment decision if he knew everything the Fed was doing or would do.  He invests agnostically to interest rates, and I suggest  that real estate players do the same, one way or another.
     
Also, on this issue, I think it is also high time for the real estate world to recognize that inflation and high interest rates are not necessarily a problem. Real estate has always been thought of as a “hedge against inflation.”  I urge the real estate world to remember this, and before dismissing my thought, consider what would happen if the deficit  truly turned into Armageddon and brought on hyperinflation; where would everyone want to be? In real estate, of course, i.e., hard assets. If you follow my thinking, we have a strong and maybe even booming economy with unleashed so-called animal spirits. What better predicate could there possibly be for canny real estate investors to create upside and Be Overpaid for Risk?

Distress is Not a Long-Term Investment Strategy:  As I have said before, distress investing is a red herring and not a viable long-term investment model.  There are a bunch of reasons for this as I have written in prior articles, but the upshot is that distressed opportunities are episodic, don’t last long, and are hard for players to have the gumption to capitalize on during market extremes.  So, except for a very few players, distress as a strategy does not warrant keeping a team around to wait for these episodes.  Instead, distressed investing should merely be a tool every savvy investor has in the toolbox so that when opportunity does knock, you can open the door promptly.

Ignore Upcoming Macro Events:  A view that I hear consistently is that there will be clarity and an ability to make more intelligent investment decisions after some upcoming macro event.  A year-ish ago, it was about whether and when the Fed would raise – or lower – interest rates.  And – you know – it is still exactly that isn’t it?  As soon as we know that, then… Then, it was the upcoming election.  Now, it is the midterms.  As soon as we know that, then… It is always something in the future that, once it happens, will supposedly provide clarity.  The answer here is simple – things will never be clear, and even if things seem clear, they are probably actually less clear.  Accordingly, real estate players should ignore these future and just do business with solid underwriting and the like.

Power Niches: As the real estate world evolves and information is more and more ubiquitous – plus AI makes it easier for competitors with little expertise to jump into the markets – my Power Niche concept will be one of the few ways a real estate player can achieve long-term outperformance.  I reference my book, If You Want to Get Rich, Build a Power Niche, which I will be updating as noted above.  I also refer to my article, “You Will (Definitely) Never “Find” A “Good” Deal Again – Redux,” since nowadays you have to create deals instead of finding them.  This is more potent advice than ever.  If you aren’t creating value, your chances of long-term outperformance are slim.

Focus Where Others Cannot: My favorite area to Be Overpaid for Risk continues to be real estate investments that have a mixed corporate business component.  These  mixed assets are simply too difficult for most real estate players to  assess and evaluate the business and/or at the same time too difficult for corporate players to assess and understand the real estate.  If you can think and work in these two worlds – corporate and real estate – you have a powerful competitive advantage and one that is unlikely to dissipate over time.  So yes this is one of the best places to play. 

Tenants and AI: I mentioned this year as a (sleeper?) BIG issue for AI and real estate, which had then been talked about very little – and I still have heard precious little or nothing about it.  And that is, the effect AI will have on our tenants.  In the end, real estate success or failure is based on who you rent to or who you sell to, and that is many different businesses and persons.  These businesses will find themselves growing (fast, maybe) or dying (fast, maybe) depending on what AI does to them.  I would therefore suggest that real estate players put the anticipated effect of AI on the tenants or prospective tenants of their properties on their due diligence checklist.  I am guessing many are  already doing this, but I suspect it will become more mainstream.  Interestingly, I don’t think I have seen even a single article about this in the real estate press.  

Diversification:  As I get older, I realize how incompetent I am in making predictions.  Many times, I feel sure that I am right about something, but it just doesn’t turn out that way.  In making predictions, and relying on them, our brains are our worst enemy as, in attempting to make us feel good, our brains remember when we were right but conveniently forget when we were wrong.  We all have to make predictions one way or another to survive, but like it or not, we really don’t know what is going to happen.  If we truly internalize this inability, my thesis is that it will lead us to the view that the optimal real estate investment strategy is diversification. The diversification would be as, well, diverse as possible, including:

  • Geographic – not only different cities but different types of locations (i.e., cities and non-cities)
  • Product type – retail, industrial, office, multifamily, niche, etc.
  • Investment profile – i.e., where in the capital stack
  • Debt and equity
  • Whatever else you can think of to include

Now, here are my predictions for 2026:

1.   Data Centers:  Everyone is talking about this every day.  Is it a big bad bubble that will burst and take everyone down with it, or is it a tectonic change in the real estate world that you will be as upset as the music company that turned down Elvis years ago if you miss out?  So which is it?  Well obviously, neither I nor anyone else knows the answer, but my instinct is that data centers are not another dot-com bubble but instead really real.  My reasoning is that data centers – like all of real estate – run on tenants.  Those are the gasoline that power real estate deals, and most of the key tenants are mega companies that have ridiculously large cash hoards.  Yes, Open AI is the poster child for owing over $1 trillion and having no cash, so I would be concerned about that one, but Google, Meta, Microsoft, Apple and the others are flush with more cash than the world has ever seen.  So, I think data centers are going to be front and center in 2026 where the money is and will be for some time.  Having said that, watch out for political and related backlashes from local communities and assume the worst for that risk when selecting particular projects.  

2.   New York Office:  My prediction last year was that there would be an office shortage in New York City and that is exactly what has happened.  And, right before our eyes, this is going to become more and more pronounced.  Most businesses that are in NYC have to be in NYC – my law firm is one of them – we can’t leave even if we wanted to, and we all need office space whether we like it or not.  And space is being eaten up by expanding businesses plus – most obviously – at the same time the supply is shrinking due to the conversion of obsolete offices into residential and other uses.  A couple of years ago, you needed a crystal ball to predict an office shortage, but now it is front and center.

3.   Office as an Asset Class:  As we know, real estate is a local business and so it is with office.  Some markets will do great for office and others not.  San Francisco does appear poised for a major rebound similar to NYC, but my assessment is more anecdotal than based on fundamental analysis.  Overall, my suggestion for office is that for a diversified portfolio office should neither be shunned nor targeted.  It is a perfectly viable asset class just like the other ones.  The lesson, which is easy to say but I admit is awfully difficult to put into practice, is that when the media goes nuts to the negative – calling office a four-letter word – and liquidity and investment interest dwindle to virtually nothing for an extended period – it increases the odds that that is the best place to Be Overpaid for Risk.  It is now too late to do that in most office markets, sorry to say.

4.   PACE Financing:  Its time has come.  My firm just – again – closed what I think is the largest PACE loan ever – $420M.  Even today that is real money!  And this is the perfect product for, well, just about everyone.  For those (e.g. insurance companies) who want to clip coupons, there is nothing safer than a PACE loan since it primes everything.  For those who want long-term fixed rate financing, it is primo for the same reason.  And for those who still are touting environmental advantages, it is front and center there as well.  If you aren’t thinking about where to put PACE in the game you are missing a tool in the toolbox.

5.   Mating Among Real Estate Companies Will Not Slow up but increase:  As investors reckon with the difficulty of outperforming in traditional asset classes they will be even more eager to find real estate companies with competitive advantages – dare I say Power Niches – and seek to tie them up one way or another.  This will range from outright acquisitions – to multi-property joint ventures – to programmatic relationships, with the upshot that the investor will want to own as much of the sponsor’s talent as it can, while at the same time paying as little as possible for it.  And back the other way, the talented parties with the Power Niches will benefit greatly from strong and reliable sources of capital.  This is an obvious win/win for all parties and started several years ago, but my prediction is it is at most mid-swing and will pick up even more momentum.  By the way, these transactions are not easy ones from the legal point of view; accordingly, retaining the top law firm in NYC in these types of platform transactions will be critical – how subtle is that?

6.   Development Will Finally, Finally, Happen:   I have been flogging this horse to no avail for the past two or three years; making the point that development is the premier place to Be Overpaid for Risk.  The high yield debt markets have all the old players in them plus crowds of new players, so the risk/reward profile is no longer robust – it is now average paid for risk at best.  Real estate development projects are simply desperate for development dollars, yet investors still say things like:  “We aren’t doing development right now.”  I say, you oughta get started already, since the parties seeking your capital will offer you the world for it.  This is what you dream of; namely, developers standing in line – like Oliver Twist asking, “Please sir, I want some more,” begging for capital on almost any terms.  Opportunity is not knocking – it is smashing on the door with one of those battering rams.  Don’t say no! 

7.   Artificial Intelligence Will Provide…Intelligence…but not destruction of our industry:  I still like Bill Gates’s quote here that people tend to overestimate the changes that will occur in the next two years but underestimate the changes that will occur in the next 10 years.  Overall, my sense is that AI will have a great effect on real estate companies but not that much effect on projects themselves.  More specifically:

  • Real estate players will be able to achieve increased efficiencies, as companies use AI to eliminate employees and make their businesses run more efficiently.
  • Intelligent real estate players will use AI as a wonderful servant, but avoid letting them be their masters.  This means that real estate players will use AI to avoid mis-steps and to seek out problems and errors in their investments and development decisions.
  • And finally, AI will be more and more helpful in assessing demographic and other changes in markets and in assisting real estate companies in evaluating the viability of real estate projects.

However, the wonderful thing about real estate is, as we all know, it is unique!  And the Achilles Heel of AI is uniqueness.  So, viva la uniqueness.  Real estate is and will continue to be one of the industries least disrupted and messed up by AI.

8.   A Recession:  You should know me well enough by now to know you can skip this paragraph.  Do I – or anyone – really have the ability to predict a recession?  But I will promulgate these two thoughts: (i) if the answer to this question matters to you that much then there is likely a hole in the long-term viability of your real estate business – for long-term success it should really not be dependent on recessions – sometimes the economy will give you headwinds and sometimes tailwinds, but your ship should always move forward one way or another and (ii) the only thing that likely does have predictive effect, I say anecdotally, is that if a large percentage of economists agree then the odds are very high that they are wrong – and if you look around now there is really no consensus among economists; accordingly, there is really nothing pointing for or against a recession. 

9.   For Funds, Big and Boring Versus Little and Exciting – Both Will be Viable:  As I have written in other articles, there are huge benefits to being small and nimble in the fund business.  The risk/reward for promote maximization and the talent acquisition benefits recommend the benefits of smaller more frequent funds.  Having said that, the enormous benefits of a steady source of fee incomes from mega-funds can hardly be ignored.  So, my prediction, and advice, is that the big will get bigger and the small will get smaller, i.e. bigger funds should strive to be mega-big and smaller funds should strive to be niched as much as possible. 

10.  The Real Estate Industry Will Be Very Active – But True Bargains Will be Relatively Rare: The real estate world is ready to do business again and it is already happening.  This past quarter was by far the busiest my law firm has ever experienced.  And every time we think this is the pause that refreshes, yet another wave of deals comes in.  This explosion of activity is really real and my prediction is it is going to be a very busy year in the real estate industry. Lenders will lend and borrowers will borrow. Buyers will buy and sellers will sell.  Troubled deals will be promptly restructured.  Having said that, I don’t see much in the way of bargains any more – there is too much availability of capital and information that will drive bargains up to market pricing too fast. 

11.  And Here is a Non-Real Estate Prediction You Might Enjoy:  Scarcely a day goes by that we don’t hear about the baby bust and how our population is shrinking with coming Armageddon.  Well, I have a contrary view, which is this.  Taylor Swift and Travis Kelce are getting married in June, if I have the date right.  I predict that Taylor Swift will become pregnant this year and suddenly an awful lot of women – and men too – are going to wonder why in heck they aren’t doing the same thing?  And a baby boom will be created out of the baby bust.  I would like to say you heard it here first, but I admit that someone else told me this idea, but it does make a lot of sense doesn’t it? 

In conclusion, gold and stocks and most other asset classes are booming, yet real estate continues, like always, to just sit there looking boring.  That is frustrating to all of us, of course, but we should be mindful that greed can turn to fear in a market with unnerving rapidity.  If we are wrong about missing the upside of an investment, it is a bummer, but if we are wrong about missing the downside, it can be a calamity.

Maybe real estate is where the smart money should be going.

As always, I wish the real estate industry the greatest success.

Bruce Stachenfeld aka The Real Estate Philosopher™