Quality Matters More Than Ever for REITs

Premium Flagship Update

Commercial real estate has finally moved past the panic phase and into the grind phase. That is real progress, even if it does not make for sexy headlines. Prices are no longer falling in a straight line. Transactions are no longer frozen. Financing is available again for the right assets and the right borrowers.

And the market is doing what it always does after a rate shock: it is slowly finding a clearing price, one deal at a time, while the loudest voices argue about whether the sky is falling or the sun is shining.

The most useful way to think about the current setup is that the U.S. CRE market is now a two-speed economy. The top tier assets in the strongest sectors are behaving like normal real estate again. They are leasing, they are producing dependable cash flow, and in many cases they are regaining modest pricing power.

Meanwhile, the weakest property types and the weakest buildings, especially older offices in mediocre locations, are still in workout mode.

That split is going to define 2026 and likely the next several years. If you own quality, you are on the right side of the divide. If you own “cheap” that is cheap for a reason, you are going to spend a lot of time talking to lenders.

What changed over the last 12 to 18 months is that capital markets started working again. That is not a minor point. Commercial real estate is not like the stock market where prices can instantly reprice on a screen. Real estate reprices when deals clear. Deals clear when financing is available and when buyers and sellers can agree on what the asset is worth.

We are not back to easy money. We are not back to carefree leverage. But we are back to a functioning market. That is why you are seeing more transactions, more recapitalizations, and more “creative” capital solutions that bridge the gap between yesterday’s valuations and today’s cost of capital.

Office remains the headline risk, and it will stay that way. There is no reason to sugarcoat it. National vacancy is still sitting at ugly levels, and even when the pace of deterioration slows, the sector is not magically healthy.

The real story is dispersion. The best buildings in the best submarkets can still lease. Tenants are paying for quality, amenities, and locations that help them attract workers.

The rest of the office stock, especially older commodity buildings with high capex needs, is fighting a structural demand problem. That is not a cyclical dip. It is a reset. In this environment, it is not the building that kills you, it is the capital stack.

If you own the wrong office building with the wrong leverage and a maturity coming due, you are not running a real estate business. You are running a negotiation.

Multifamily is healthier, but it is not a free ride either. Apartments are working through a supply hangover in a number of markets, especially those that built aggressively when money was cheap. That shows up in concessions and slower rent growth. It does not mean the sector is broken. It means we are back to a more normal environment where operators earn their keep by protecting occupancy, managing expenses, and being smart about capital improvements.

The longer-term support for housing is still there. The U.S. has a massive affordability problem, household formation continues, and new supply will slow as financing remains tighter. But 2026 is likely to be a year where the winners are the best operators, not the most leveraged buyers.

Industrial and logistics remains one of the steadier cash flow stories. Vacancy has moved up from the extreme lows of the pandemic era, but the pipeline is cooling and demand is stabilizing. Industrial is not immune to cycles, but the long-term drivers are still intact.

We are still moving goods. We are still building out supply chains.

We are still seeing reshoring and infrastructure investment. And the industrial landlords with the best portfolios and the best tenants can continue to compound value, even without a roaring economy.

Retail is still the sector that keeps embarrassing the experts who declared it dead. The reason is simple. Supply. There has been so little new retail construction for so long that well-located centers have real leverage. Necessity-based retail, grocery-anchored properties, and high-traffic convenience centers can maintain strong occupancy and push rents where they have the right tenant mix. Retail is not risk-free.

But the days of assuming every shopping center is a melting ice cube are over. The best retail landlords are running real businesses with real cash flow and real pricing power.

And then there is the magnet sector: data centers. Whether you love the theme or think it is getting crowded, it is undeniable that data centers are pulling capital, land, power, and construction labor into one lane. That affects everything. It shapes investor preferences. It shapes competition for development resources. It shapes where banks and private lenders want to put money.

If you want to understand the new hierarchy of real estate capital allocation, start by looking at what the market is willing to finance quickly and at scale. Data centers are near the top of that list, and the ripple effects reach into industrial, power infrastructure, and even certain pockets of office and suburban land.

Now let’s bring this back to what matters for the Flagship REIT portfolio and for you as a REIT investor.