Why I’m Buying Large Multifamily in 2026 (Commercial Real Estate Outlook)

0:00We talk a lot about the housing market, but what about the other real estate market? You know, the one that's worth$24 trillion? I'm of course talking about commercial real estate, including multi-family. assets. Commercial real estate is a market that has struggled as of late. Some would even go so far as to say that it has crashed. And frankly, I wouldn't argue with that. But as we sit here in 2026, commercial real estate may be poised for a rebound. So today we're digging into the outlook for commercial real estate in 2026 and exploring the potential opportunities that could exist for real estate investors in the coming years.

0:44Hey, everyone. Welcome to On the Market. I'm Dave Meyer, real estate investor, housing market analyst, and chief investment officer here at BiggerPockets. Now, on this show, we usually talk about residential real estate because that's frankly what most people in the BiggerPockets community, the people who listen to this show, invest in. But I know from talking to you all, this community all the time, that many of you currently invest in or at least aspire to invest in multifamily, meaning anything five units or bigger, maybe self-storage or even retail or office space in some cases. And that aspiration or the reason you invest in those things already is with good reason.

1:28Commercial real estate can offer, frankly, scale that residential real estate just can't do. It can offer opportunity, It can generate amazing returns, but it is really different from residential real estate. You can't really apply any of the data or the information that we regularly share on this show about residential to the commercial real estate market. Just look at the last couple of years, right? Commercial real estate has arguably crashed. You can't argue that values have declined almost across the board, no matter what area of commercial real estate that you're looking at. Meanwhile, the residential market is still holding up.

2:09They are totally different markets. And on the show, I've said a lot recently about my expectations for the residential market this year, but we haven't really touched on commercial real estate yet for 2026. So in this episode, that's what we're gonna talk about. First, we're gonna get into a brief history of what's been going on in commercial real estate in the last couple of years. Then we'll talk about the outlook for 2026. We'll give you a bear case and a bull case, what people are saying about whether commercial real estate is poised for a rebound. We'll do a breakdown of which subclasses, you know, talking about self-storage or retail, office, multifamily, which of those subclasses of commercial real estate are set to perform the best in the coming year.

2:52And of course, we'll end with recommendations and strategy tips for investors in the coming year. With that, let's get into our first look at commercial real estate in 2026. So you may know this, but commercial real estate, it's in a rut. Okay, to be fair, it's in worse than a rut. It is probably crashed by most measures of a crash. That word doesn't really mean much. No one has really defined it. But I think if values fall in any market, 20 % more from peak to trough, it's kind of hard to argue that it's crashed. And that, I think, has happened in commercial real estate. It's actually harder than you would think to get a single number of this.

3:30like how far values have crashed. And everyone is going to say a little bit different depending on the data source that you look at. But when I aggregate all the information out there, I could say pretty confidently that multifamily, at least on a national basis, pricing is down somewhere between 15 and 25%. It's pretty big. Office is down even more, 25, 35%, I think is pretty reasonable across the board on a national basis. Some markets, you've probably heard some of these crazy stories, Some markets are seeing office values down more than 50%. Meanwhile, retail, self-storage, they've held up better, but they're still down somewhere between 8 % to 12 % since they peaked in 2022.

4:14That's pretty ugly, right? If you look across the board in commercial real estate, anyone who's holding those assets is not really happy right now. But at the same time, whenever you see prices drop this much, that often leads to the biggest opportunity. A discount on multifamily of 20%, that's at least worth looking at, right? That is something that you might want to at least start underwriting. Massive discounts on office. It's not my area of expertise, but there's probably some good deals out there. You're starting to see discounts on cash flowing assets. There is potentially some stuff to like here, but you have to invest sort of thinking or at least betting that things are going to turn around, or at least at the very least, they're not going to continue to decline.

4:58So the question is, is this going to happen? Is this the time to jump into commercial real estate before prices start coming back and everyone jump back into the market? That's the question that we're going to answer today. And to do that, we need to first look at why prices are so depressed in the first place. And I'm going to talk a little bit as we go about office and retail and self-storage because those are popular in the BiggerPockets community. But for now, I'm going to focus on multifamily because that's what we here in the on-the-market community mostly look at. And I just want to be clear that there are different definitions of multifamily, but when we're talking about commercial real estate, It means any property that has five units or more, because anything that has five units or above needs commercial pricing.

5:47You can't go out and get a regular mortgage on a five unit, six unit and above anything, four units or less you can. So that's considered commercial. So when I say multifamily, I'm not talking about duplexes, triplexes, quadplexes. I'm talking about five and above. So with that, let's talk about what the heck happened here in multifamily. There's a couple of things and I'm going to break them each down for you. The first, probably can guess this, not a big surprise here, but is rates. Multifamily is priced differently than residential real estate. Residential real estate is largely priced based on comps.

6:25What have other similar assets sold in similar neighborhoods for in recent months? That's how you price a single family home. Same thing with a duplex, a triplex or a quadplex. But multifamily is priced by a combination of net operating income, basically a measurement of your profits and cap rates. And when mortgage rates or interest rates on debt for real estate, like commercial loans rise, so do cap rates. That's just kind of how it works. It's sort of complex, but I can give you a general idea of how this works. Cap rates, people have different definitions of them, but basically what they are, are a reflection of market sentiment.

7:07They reflect how investors are feeling about risk, about opportunity, about value in the market that you're working in. So let's just say multifamily. It's a reflection of do people feel like there's a lot of risk or opportunity if there's good value in the multifamily market? So because they're a reflection of market sentiment, they're always moving up and down based on a lot of different conditions. But one of the things that traditionally and pretty consistently pushes up cap rates is when the return of a risk-free asset increases. So there's a couple of terms in there that you should need to know.

7:42But a risk-free asset, there's really no such thing. But generally in finance, people consider things like bonds as risk-free assets, especially U.S. Treasury bonds, because to date, the U.S. has never defaulted on their loans. So when you look at you can buy a 10 year U.S. Treasury and get a four and a half percent return or four percent return, that is as close to a risk free investment as you can make. And so when the value that you can get from buying one of those risk free assets goes up, all other investments change. Right. It should change your mindset because you're saying, hey, I could go get four and a half percent for pretty much no risk.

8:22that 5 % cash on cash return for multifamily no longer sounds very good compared to buying a treasury because there's so much more risk in multifamily than there is in buying a treasury. And so when bond yields go up, which they have a lot over the last couple of years, that's what's pushed mortgage rates up. When those treasury yields go up, it pushes cap rates up at the same time. Now, cap rates, whether high or low cap rates are good, really just depends on whether you're a buyer or a seller. If you're a buyer, you typically want to buy at a higher cap rate. That means you are buying proportionally more cash flow and more profit for less money.

9:04If you are a seller, you want to sell at low cap rates because that means you are going to get more in terms of your sale price for every dollar of profit that your asset is producing. Now, I know that can sound confusing, so let's just do a little bit of math here, and I think you will all understand this. So if you had a property that throws off, I'm going to use a nice round number of$100 ,000 in net operating income. NOI, it's just a measurement of how much profit you're putting out. It doesn't include CapEx. It doesn't include financing costs. Just in your operating of the property, how much profit are you producing?

9:40So let's just for this example, we're going to say we have $100 ,000 in NOI and you are selling that at a 4 % cap rate. The way you figure out the value of that property is you divide your net operating income,$100 ,000 by your cap rate of 4%, and that gets you your price, which would be$2.5 million. Now, it doesn't always work exactly like that, but roughly that's how you get valuations in a lot of commercial real estate transactions. So two and a half million dollars at a four percent cap rate. Now, if that cap rate were to go up, say interest rates went up, which they did. This is pretty close to what's actually happened.

10:17Say that cap rate went up from four percent to five percent. Doesn't sound like a lot, right? It's just going from four percent to five percent. Then that math, if you now divide one hundred thousand dollars in NOI by five percent, that value of that property drops to two million. It was at$2.5 million, and now it's at$2 million. That seemingly small difference in cap rates makes a huge difference in valuation. And for those who are math or numbers inclined, you probably see why this happened, right? We had a 25 % increase in cap rate from 4 % to 5%, and that led to a 25 % decrease in valuation from$2.5 million down to$2 million.

10:58Now, that is just one example. And there is huge variance in cap rates regionally by asset class. But the general estimates right now are that cap rates went up 80 to 150 basis points. So 0.8 % to 1.5%. And again, might not sound like a lot, but as you can imagine, and our example shows us just that small change can really decrease valuations across the board. So that's number one is interest rates going up, the yield on treasury bonds going up, and therefore cap rates going up. That has really decreased pricing in multifamily. The second thing that you need to know why prices are going down comes down to debt.

11:39Now, I talked about rates going up, but the debt structures matter here as well. There's sort of two things going on with debt. First and foremost, over the last couple of months, lenders have really gotten a little bit stricter. They have tightened their underwriting. They have reduced their LTVs, their loan to value ratios, meaning that you can take out less debt to purchase a property. They have required higher debt service covers ratio. So basically, it's just harder to get debt than it was. That makes it harder to pencil, which means there are less buyers, right? If someone wants to go out and sell a property, there's going to be less demand because even if those buyers are interested, they want to buy that asset.

12:19they might not be able to get the loan that they need to make that deal pencil. And that has decreased demand for multifamily assets. That's the first thing with debt. The second thing that's going on with debt is that commercial real estate. Remember, I said that we're talking about five units and above, because if you have a five unit or above, you have to use a commercial loan. Commercial debt is very different than residential debt. You typically cannot go out and get a 30 year fixed rate loan on a commercial asset. usually you are getting a adjustable rate mortgage with a balloon payment.

12:52And those loans can adjust at three years, five years, sometimes seven years. Now you can imagine if you bought a property in 2020 or 2021, you had a really low rate. You might've had a three in front of your number. You might've had a four in front of your interest rate. Now, three years later, you're adjusting to a rate that might have a seven in front of it. It might have an eight in front of it. And that really hurts cash flow. It can actually create forced selling. Like you probably hear these things in the news. There are multifamily operators that can no longer service their debt and they have to sell their assets at a discount.

13:27And that puts downward pressure on pricing as well. Even if you can hold on to that debt, it just compresses cash flow, right? Because if you had an asset that was producing, let's just call it a 10 % cash on cash return with your old loan and then your loan adjust to a much higher interest rate, you are not making as much. And when someone comes along and looks at that deal and thinks about buying it, they're like, actually, that's not as good of a deal. I can't pay as much for this asset as someone could three years ago when they were getting much better rates. And again, that puts downward pressure on pricing.

14:03So first two things, just as a reminder, are interest rates going up and the structure of debt and debt underwriting rules are two things that have pushed down multifamily prices. And the third is supply, right? The supply of multifamily assets has gone through the roof. During the pandemic, developers were seeing, man, there is so much demand for housing. Rents are going up like crazy. I want to build more multifamily. They thought it was a very profitable time to build multifamily properties, and a lot of them did. We had one of the strongest pipelines of multifamily that we have seen in decades.

14:40And all of them started to come online at the same time. We talk about this a lot in the show in context of rent growth, but it bears true here in terms of valuation for multifamily that because there was so much multifamily coming on at the same time, that doesn't in itself push down values necessarily, but it has caused a lot of vacancy, Right. We've seen vacancy rates across multifamily go up and higher vacancy means lower NOI. Right. Your profit will suffer if you have higher vacancies or in a lot of cases, you have to lower rents and that's going to hurt your NOI as well. Or maybe you just can't grow rents.

15:20You can't raise your rents in the way that you could in a normal year or certainly during the pandemic. And so NOIs are compressing. And so rent growth has been slow. Vacancy has been going up. And all of that is happening not at a good time. It's happening at the same time where other expenses like taxes or insurance or maintenance costs are all going up. So NOI is getting squeezed on both sides. We're seeing lower rents and lower income, higher expenses. That means lower NOI. So if you add these things together, you know, higher debt costs, lower NOI, it's just not as profitable to own these assets as it was a couple of years ago.

16:00So this is kind of a near perfect storm. It's not a perfect storm because there are actually some good things going on, and we're going to get to that. But if you think about it, higher cap rates, lower NOI, tighter lending, all of it points to declining values in multifamily, which is exactly what we've got. This stuff makes sense when you understand the fundamentals. Now, that's just multifamily, but a lot of the same challenges exist in other parts of commercial real estate, too. Those debt problems and the higher interest rates exist across the board. But the reason that you see self-storage, for example, or retail doing a little bit better is they don't have the same pressure on NOI as multifamily.

16:41The vacancy rates in self-storage and retail haven't been as high. And so that's why multifamily has seen bigger declines than those two asset classes. And on the other end of the spectrum, it's why we're seeing office get absolutely demolished because their revenue is getting crushed. They have much higher vacancies. Rent rates are going down significantly in the office specter. So their NOI losses are worse. And that's why valuations in office have fallen the furthest. So generally speaking, this is the backdrop for multifamily over the last couple of years and other commercial assets. But when we come back from this quick break, we'll get into whether or not this is going to change.

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19:27Welcome back to On the Market. I'm Dave Meyer talking about the outlook for commercial real estate in 2026. Before the break, we talked about some of the backdrop for why things have declined. And now, because we understand sort of the fundamentals that have led us to where we are today, we can examine the case for commercial real estate rebounding in 2026. And we're going to look at both the bull and bear cases. On this show, what we like to do is present arguments for both sides because no one really knows. And there are arguments in both directions. and I'm going to share both of them with you right now, and then I'll give you my general opinion, how I interpret these arguments and all of this data, and frankly, what I'm going to do about it.

20:07So first up, we're going to talk about the bullish case for 2026, why things could potentially turn around. The first argument is basically that the market has corrected and it has stabilized. It's not like it has been in a continuous freefall. We actually see that most of the declines in multifamily happened from early 2022 to early 2024. And then actually, by some measures, we've seen modest gains in pricing in multifamily in 2025. If you look at some projections like from Green Street, they're actually predicting that appreciation will continue in 2026. And this is largely because this exercise of what's sometimes called price discovery, basically when market conditions change, sellers and buyers have to readjust.

20:52They have to, you each other out and figure out what's a fair price in this new paradigm. Given everything we know about interest rates, NOIs, rising expensive, what is a fair price? And so the argument for that things are turning around is that that price discovery exercise has already been done. Things are starting to stabilize and maybe we've found a bottom where we can start to grow off of. Argument number two for why things might start to turn around is that capital markets might actually start to thaw. I mentioned earlier that one of the challenges in multifamily of late is that lenders have tightened their underwriting.

21:27They have made it harder because they've sensed a lot of risk. But as the Fed lowers rates and as the tide starts to turn, there is a general sense that capital markets are going to get a little bit easier. It's going to be a little bit easier to get loans. And that means that might bring more demand back into the market. Right. Not only could rates come down, but more people will be able to get the loans and qualify for the loans that they need to purchase multifamily. And if that's true, that should help prices, right? In basic economics, if there are more people who can afford to buy products, that leads to more demand and that puts upward pressure on pricing.

22:05The third argument for why things might have bottomed is just that multifamily supply is coming down. And this pendulum that constantly swings back and forth in terms of multifamily supply might be swinging in the other direction. Remember what I said earlier, that during 2020, 2021, developers got super excited about building. They started all of these projects. Those projects didn't really hit the market until 2024 or 2025. And that's why in the last two years, we've seen so much supply. It's compressed NOI. It's brought down rents. But starting in 2022, when mortgage rates went up, when lending got harder, development really stopped.

22:45This pendulum swung like almost all the way in the other direction. And we went from a time where there was a ton of construction to a time there were there really, really low levels of construction. So this is actually something that you can pretty easily forecast because it takes two, three, four years to build a multifamily property. We actually know with a fair degree of confidence how much new supply is coming on in the market this year, next year and the year after that. And it's not a lot. And so if you look at that, there is a good argument to be made that rents are going to start going back up because if there is a decrease in supply and there's still housing demand and by all measurements, we still have a housing shortage in the United States.

23:24If that supply goes not just back to normal, but actually swings all the way to being not a lot of supply, that bodes well for rent growth, and that could help NOIs grow in the near future. So there are obviously other cases and arguments to be made, but those are the three big ones that at least I buy into for why multifamily might turn around. Now, of course, there's a bearish case, too. A lot of people don't think this is the year that things are going to turn around, and these are the main arguments. Number one is that the refinancing pressure from adjustable rate mortgages, that hasn't really gone away, right?

23:59We still have a lot of people who bought in 2022, 2023, and the COVID years basically whose interest rates haven't adjusted yet. Maybe they got a five-year arm in 2021 or 2022. And so we're going to still see people have a lot of pressure on themselves, not all operators, but there's still a good amount of operators who are now going to see their cash flow significantly compressed, their NOIs come down because their loan adjusts, and that could actually lead to forced selling. And as we talk about in residential, it is true here in commercial, too, when there is forced selling that puts downward pressure on pricing and that could still remain in 2026.

24:38The second thing is that, yes, I said that supply is going to come back to earth. That's mostly on a national level. There are still a lot of markets where there is a lot of supply glut that hasn't been worked out yet. There's still negative net absorption basically mean there is more supply coming on than there is demand, and that could suppress the entire industry. And then the third bear case for why multifamily might not rebound is because there's just still kind of a lot of garbage out there. There's just not that many quality assets on the market. Not a lot of people who have great, strong performing assets are choosing to sell right now, because if you don't have to, it's not the best market to sell into.

25:21And so if there's not good inventory on the market, it's harder to pull buyers off the sidelines into the market to buy junk, right? Like if there's just really bad deals out there, people are going to who have been sitting on the sidelines, they're going to continue sitting on the sidelines. If, however, all of a sudden we see really strong assets and great locations come on, we might pull people off the sideline. But there's still a lot of junk to work through in terms of inventory. And that's another reason why 2026 might not be the year to rebound. So when I read this, I think there's strong arguments on both sides.