Commercial Real Estate Is Getting Too Cheap to Ignore
Poor commercial real estate. Fewer investors want to touch it after being burned by falling property values in recent years. They have better options anyway. Why settle for 7% annual returns on real estate when Nvidia is delivering 70%?
Yet property is one of the last assets in the U.S. that looks fairly priced and could turn out to be a place to hide if there is an artificial-intelligence bubble.
Institutional investors like pension funds and insurance companies have traditionally been the backbone of the commercial-real-estate market, allocating 10% or more of their portfolios to property. They bought buildings as an inflation hedge, for steady income and to own assets that aren’t correlated with the stock market.
But they haven’t come back to buying real estate in big numbers despite five Federal Reserve interest-rate cuts since September 2024, and another one likely in December.
Data from MSCI show large investors have bought $4.6 billion more U.S. property than they sold so far in 2025—the first time in three years that they have been net purchasers. However, deal activity is weak compared with historic norms.
The role of commercial real estate in big investors’ portfolios is under scrutiny. Returns on U.S. property have been disappointing, especially for apartments and offices. Since the third quarter of 2019, private real-estate funds have returned 20%, compared with 150% for the S&P 500.
Infrastructure and commodities have been better bets, too. In 2025, institutional investors reduced their target allocations to real estate, Hodes Weill & Associates’ allocation monitor shows.
Some problems couldn’t have been foreseen. The pandemic was a blow for commercial real estate, and a return of inflation that triggered the fastest increase in interest rates in decades damaged property values. But investors also underestimated the amount of money that would need to be invested into aging properties to make them attractive to new tenants.
U.S. commercial-real-estate values are still down 17% from their 2022 peaks on average, according to Green Street. Offices and apartments are valued at especially deep discounts of 36% and 19%, respectively, from their peaks.
This has left institutional investors with billions of dollars of real estate on their books that is now worth less than what they paid for it. The appetite to buy more is low.
Investors also have other options to diversify their risk. Infrastructure, data centers and private credit are popular with portfolio managers. Commercial real estate must now compete with these buzzier assets for capital. Investors can make better returns at the moment lending against real estate than actually owning it.
But this is one of only a handful of occasions when U.S. commercial-property prices have fallen more than 10%. The previous two times were the early 1990s and the 2008 global financial crisis.
“People are looking at commercial real estate now and see that it is relatively cheap versus other assets,” says James Millon, co-head of U.S. and Canada capital markets at CBRE.
Based on the difference, or spread, that investors have historically demanded to own real estate over more-liquid corporate bonds, private real estate is now fairly valued, according to Green Street. In the public market, property stocks look like a bargain. Real-estate stocks are the cheapest they have been relative to U.S. equities in two decades, data from CBRE show.
Opportunistic investors are already doing deals. RXR has been buying Manhattan offices from institutional investors at prices 30% to 50% below peak values. Blackstone has also bought an office in San Francisco.
Many institutional investors don’t want to spend the money needed to refurbish even a high-quality office to get it relet. “It is a painful part of their portfolio, and they don’t want to deal with it anymore,” says RXR’s Chief Executive Officer Scott Rechler.
As debt costs are expected to remain higher, the old playbook for investing in real estate no longer works. For more than a decade after the global financial crisis, low interest rates pushed up property prices, and an abundance of cheap debt amplified returns for investors. But buyers can no longer assume that real-estate values will rise as fast as they used to.
This makes the income that a building generates much more important. The assets now yielding the best income? Unfashionable kinds like senior housing, retail and quality office buildings.
New construction of some types of commercial real estate has been muted because of inflation. Construction costs have increased more than 40% from 2020 through the third quarter of 2025, according to Mortenson data, making it harder to justify new builds financially.
This is a good sign for existing owners, especially in retail where little has been built in more than a decade. As supply tightens, landlords will have power to raise rents.
In theory, a 40% increase in building costs needs a corresponding 40% increase in rents for fresh construction to pencil out. This points to an extended period of rent growth for owners with little competition from new supply.
Property underperformed between 1997 and 2000, a time when investors were also distracted by more eye-catching opportunities in tech. “A slow and steady investment was the last thing investors wanted in the dot.com bubble,” says Cedrik Lachance, director of research at Green Street.
But if the AI rally slows, or slumps, property could eventually go from being unpopular to a place where investors want to shelter.