Perspectives

After several challenging years, real estate markets are finally staging a comeback. 2026 is shaping up to be a crucial milestone for asset managers and investors. Asset and rental values have either stabilized or risen across key sectors, such as logistics, apartments, and even the long-beleaguered office and retail markets. While hurdles remain, transaction volumes are climbing and perhaps most tellingly, debt capital markets that dried up for real estate during the interest rate shock of 2022–2023 are once again opening their liquidity taps.

Indeed, real asset direct lending is flourishing, even as traditional debt markets continue to heal. Distressed assets are creating entry points for patient capital and diverging property-sector fundamentals will likely reward discerning investors who can parse genuine longer-term supply-demand imbalances versus fading post-pandemic and rate-shock ripples.

Major private market asset managers have been responding to this shift in real time. “We’re already beginning to see the green shoots materialize,” Ares CEO Michael Arougheti said in early November, citing the surge in recent deployment activity, with Ares’ third-quarter real estate investments up 78% globally year-over-year and 51% higher than the second quarter.

Solid Macro Foundation

Surprisingly resilient economies, both in the U.S. and globally, underlie real estate’s turnaround. Despite widespread predictions for a contraction this past year, the American economy has continued to grow. Investment in the artificial intelligence (AI) revolution—everything from the latest semiconductor chips to building data centers, laying new energy infrastructure, and corporate deployment of AI tools to drive productivity gains—has fed into strong GDP gains. “As our relationship with technology continues to evolve, the demand for real assets will continue to grow, and we'll see that in real estate and infrastructure,” said Julie Solomon, Co-Head of Ares Real Estate. In addition, the labor market has so far held up, while fiscal stimulus is expected to ramp up investment in the coming year.

Indeed, the AI buildout may just be getting started, as part of a broader framework called the New Economy. This reflects evolving patterns in how people live, work, and consume. “We are focused on sectors aligned with these shifts such as logistics, data centers, multifamily, student housing, and self-storage, which aren’t just demand-driven,” said Solomon. “They’re being enabled by broader trends like the AI buildout and digitization, supply chain transformation, and the growing desire for flexibility.”

“When you think about trends like digitization, AI, e-commerce, and onshoring, you think that they’re really advanced, but the reality is that they're in their infancy, and their impact will increase over time,” she added.

Massive capital expenditures, potentially in the trillions of dollars, will be needed to grow and power the infrastructure for this new and evolving AI technology. In many ways, the market has seen this before with past technology booms like railroads, the internet, and mobile infrastructure. The key difference is that some of the world’s most profitable companies, known as hyperscalers, are funding this buildout through their operating cash flows.

Hyperscalers expanding capital expenditures
on physical assets by 50% YoY in 2025

Many households have also benefited from the AI market boom. Supported by significant equity holdings, higher-income households have seen a large increase in real household wealth over the past two-and-a-half years. This increase in household wealth has fueled particularly strong spending by the wealthiest 10% of households. Over the past year, real consumption has increased by 2.7%, outpacing real disposable income growth by 80 basis points.¹

One particularly compelling opportunity set involves data center development, where demand from cloud computing and artificial intelligence applications is creating acute supply shortages. “We continue to see robust opportunities to support the energy and data center needs for the digital economy, as demand is significantly outstripping supply and data center vacancy is running at historic lows,” said Arougheti. Investment managers with land banks in strategic locations and development expertise are positioned to capture outsized returns as tenants scramble for capacity.

The monetary policy backdrop has also shifted dramatically. With inflation staying relatively manageable, though still above its target 2%, the Federal Reserve (Fed) has begun to unwind its aggressive tightening campaign that sent shockwaves through property markets in 2022–2023. Recent cuts to the benchmark federal funds rate are already flowing through to real estate, reducing debt service burdens and making leveraged acquisitions more attractive.

“We're seeing stabilization in the real estate market after a period of higher rates and higher supply,” said Solomon. “And now that values have reset, we believe we are at an inflection point that creates really exciting opportunities to enter the market.”

Historically, the best return periods tend to emerge at this kind of inflection point, when the market pivots into recovery. Recoveries typically last around five years, with full upcycles averaging eight. During those five years, unlevered CRE returns have historically averaged 13% annually—400 bps above the long-run average.²

What’s more, Ares believes the Fed is unlikely to ease policy as much or as quickly as many investors expect. Whether the Fed cuts its rate by 25 basis points or up to 75 basis points over the next year, this should continue to support favorable conditions for both lending and transaction markets.

Recovery Cycle Kicks into Higher Gear

Meanwhile, the cost of capital—which had spiked to levels that made deals unattractive or at least put many potential transactions in a “wait-and-see” limbo—is falling back to levels that restore investment viability. “It took a couple of years for real estate to bottom out,” said Solomon. That 2022–2023 phase of the cycle featured forced sellers, cautious buyers, narrowing bid-ask spreads, stabilized or falling transaction volumes and prices, limited debt availability, building queues for investor redemptions from funds, and many real estate investment trusts (REITs) trading below their net asset values.

Now, in the recovery phase, those trends have essentially reversed. Improving sentiment and thawing debt markets have lifted transaction volumes. In general, REITs are trading closer to their net asset values (NAVs), redemption queues are normalizing, and the market’s fundraising for closed-end funds is growing.

“Throughout our history, we have focused on effectively identifying and investing behind long-term and large-scale trends that are driving real estate demand. Those secular opportunities are converging now at a point in the market cycle that provides a very compelling entry point,” said Solomon, adding, “Our strategy has always centered around secular trends, but now we're seeing cyclical tailwinds, and that convergence is setting us up for substantial growth.”

The latest data on transaction growth and pricing bears this out. Transaction volume growth, which had been trending around 10% year-on-year, grew by an estimated 17% in the third quarter. Property prices, which were flat in the first half of the year, resumed their gains in the third quarter, broadly appreciating by 0.9% on a quarterly basis, with retail up 2.5%, offices up 2.0%, logistics up 1.0%, and apartments adding 0.5%.

Overall volume up 17% YoY in Q3

Meanwhile, debt capital markets show renewed appetite for real estate exposure, with loan origination volumes increasing across major lending types. Banks, which had pulled back sharply from commercial real estate lending over the last few years, are selectively reentering markets, though they are primarily focused on supporting their major borrower relationships and cleaning up existing books. Additionally, with debt markets strengthening, lending spreads continued to normalize in the second half of the year after expanding in the spring in response to tariff uncertainty and broader financial market volatility. Most significantly, the pricing uncertainty that paralyzed dealmaking for the past few years has diminished as buyers and sellers narrow their valuation gaps.

“We are seeing significant opportunities in real estate lending, where we are able to step in and help banks, owners, and corporates liquidate their assets and refinance their portfolios,” said Solomon.

Meanwhile, fundamentals in the apartment market remain compelling. Persistent affordability challenges in the for-sale market, exacerbated by sharply higher interest rates, have kept many would-be homebuyers in the rental market longer, supporting apartment demand and allowing the market to digest the significant new supply delivered over the last several years.

Logistics properties, the star performers of the pandemic era, are also benefiting from favorable long-term tailwinds. E-commerce, which is now nearly one-quarter of all retail sales, is seeing a new wave of growth supported by AI adoption. Additionally, shifts in supply chains and the nearshoring of manufacturing are driving new demand for logistics space. The logistics market faced headwinds earlier this year as tenants delayed decisions in the face of extreme uncertainty around trade and tariffs. With renewed clarity taking hold, companies are once again leasing new space, which should allow the logistics market to normalize over the coming months. As a result, we expect tenant demand for well-located logistics facilities to recover in 2026 as companies absorb excess internal supply chain capacity and sales growth continues. The dramatic pullback in new supply—a function of both financing constraints and diminished speculative development—should support improved fundamentals for the logistics sector.

Significant Opportunities and Strategies

For investors, the current environment presents a menu of opportunities reflecting different risk-return profiles and market views.

Direct real estate lending has emerged as another compelling near-term opportunity. Traditional lenders’ retreat has created a significant financing gap, particularly for transitional properties and non-prime borrowers. “Private credit funds and opportunistic lenders are stepping into this void, commanding yields that reflect both higher base rates and wider credit spreads,” said Kipp deVeer, Co-President at Ares. “The combination of higher returns and first-lien security has attracted substantial institutional capital. Many investors still want steady income and defensive positioning because public markets are still very volatile,” he added.

“The impact of rapidly rising rates disrupted commercial real estate lending and created white space for non-bank lenders,” said Solomon. Private credit flowed into the vacuum, offering flexible capital and strong underwriting capabilities that could target attractive risk-adjusted returns that traditional lenders are challenged to match given their regulatory and balance-sheet constraints.

Gap capital—mezzanine debt and preferred equity—offers another compelling entry point. Lower property values against fixed-mortgage balances mean that many managers of quality real assets face equity shortfalls that they must fill to avoid distressed status. This creates opportunities for capital providers to earn returns significantly above traditional senior debt and to maintain downside protection through loan-to-value cushions that didn't exist in the frothy markets of 2021.

Assets that have been starved of capital since net operating income declined and interest costs spiked are creating acquisition opportunities for buyers with patient capital and operational expertise. Open-end funds facing redemption pressures, funds approaching end-of-life, and over-leveraged corporate owners are all creating motivated seller situations.

Corporate dislocation provides another avenue. Increased take-private transactions, corporate divestitures, and REIT restructurings are creating asset acquisition opportunities outside traditional real estate sales processes. Joint ventures between operating companies seeking to monetize real estate and investment funds seeking operating platforms have become increasingly common. “We've seen these cycles before, and we know that dislocation creates opportunity,” said Solomon.

Navigating the Terrain

The improving market environment still comes with risk. Interest rate volatility remains a concern; if inflation proves more persistent than expected, any reversal in monetary easing could dampen the nascent recovery. Economic growth, while currently exceeding expectations, faces potential headwinds from elevated valuations in other asset classes and geopolitical uncertainties.

The real estate market recovery will likely prove uneven across sectors and geographies. The bifurcation between prime and secondary assets seems likely to intensify, with capital flowing disproportionately to the highest quality properties in the strongest markets. Tertiary markets and older properties may face persistent challenges as tenant preferences and capital allocation favor newer, better-located alternatives.

Tariff impacts and trade policy uncertainties have mostly quieted from earlier in 2025, yet remain wildcards that can disrupt growth trajectories. Companies are responding through supply chain relocations and manufacturing reshoring, creating both opportunity and risk for industrial properties based on geographic exposure.

After years of playing defense, however, private real estate is making a case for offense once again. For patient investors looking at the shifting landscape, the environment appears increasingly favorable. Ares continues to maintain concentration in the logistics and residential sectors globally, while growing exposure to student housing and residential self-storage, and starting early rotation investing into hospitality and senior housing. Capital flows are shifting as well, with banks reentering the market and evolving hybrid structures, from downside protection to bridging valuation and liquidity gaps.

“We are positioned to take advantage of what we believe is a historic entry point for real estate investing,” said Solomon. “Our conviction in the market comes from experience. And we've seen throughout our history that dislocation creates opportunities. Realizing those opportunities requires the tools and the discipline to transact when others are pulling back,” she added.

The scale advantages of leading platforms are becoming more pronounced. Ares, for example, believes its real estate strategies exhibit “many of the benefits of scale that we've experienced over the years in other parts of our business in terms of origination, the ability to invest in portfolio management, access to financing, [and] . . . our transformation to a fully vertically integrated platform,” said Arougheti. “We now have the ability to develop and to asset manage the entirety of any business, and that's a highly, highly differentiated skillset.”