The recovery in global commercial real estate remains intact but is becoming increasingly uneven, with data centres and rental housing emerging as the biggest beneficiaries of structural demand shifts, according to Principal Asset Management.
In its mid-year real estate outlook, the $577.9 billion asset manager said the current cycle was unlikely to deliver a broad-based rebound, with returns increasingly determined by individual property types and markets rather than the wider asset class.
However, the firm said sharp valuation reset over recent years has created opportunities for investors willing to be selective, with repricing improving entry points in sectors supported by long-term structural demand drivers.
“Corrections of this magnitude have only occurred twice before – in the early 1990s following the S&L crisis and again during the GFC. In our view, this repricing has helped to materially de-risk the asset class,” it said.
The manager noted signs of recovery emerging across major markets as unlevered total returns in Europe rose 6.2% year-over-year in the first quarter of 2026, while U.S. unlevered total returns increased about 5% over the same period.
While income was the primary driver of U.S. returns with capital appreciation still modest, it said positive total returns typically persist once the market has turned.
“We view this as a highly differentiated and compelling environment to generate alpha through selectivity and execution,” the firm said.
“Despite ongoing geopolitical uncertainty, repricing and declining new supply are creating an attractive entry point, particularly in sectors supported by strong secular demand drivers such as data centers and rental housing.”
The firm said data centres fundamental remain strong across commercial property, supported by tight availability in major markets and continued pricing power.
“Demand for data center capacity continues to accelerate alongside the expansion of artificial intelligence and cloud computing, reflecting a structural increase in compute intensity across the economy,” said Rich Hill, Global Head of Research and Strategy at Principal Real Estate.
He said rental housing was also benefiting from affordability constraints that have reduced home ownership opportunities across the United States and Europe.
Hill added the issue was increasingly a mismatch between housing supply and demand, supporting rental demand in markets where new supply has failed to keep pace.
“Residential remains a liquid and sought-after sector, supported by affordability constraints in the for-sale market and favourable demographic trends. However, elevated new supply is still being absorbed in select markets,” he said.
The firm said other property sectors would experience more varied recoveries, with industrial markets becoming increasingly dependent on local conditions and office demand concentrated in high-quality assets.
“Property type selection still matters, but the more compelling alpha opportunity lies in identifying the right global markets offering the highest annual rent growth,” Hill said.