Measured optimism: Peter Linneman’s 2026 market outlook

Economist Peter Linneman delivered a pragmatic assessment of the economy during a recent Walker Webcast at Institutional Real Estate, Inc. (IREI)’s VIP Americas event. It’s exactly what our industry needs right now. He addressed the contradictions defining today’s market and highlighted structural trends that real estate leaders should watch closely.

Here are my top takeaways from the conversation.

Economic signals are mixed, but directionally positive

Despite consumer sentiment remaining nearly as low as during the pandemic, Peter pointed to a resilient U.S. economy. Strong holiday spending and low unemployment claims show that people still have money and jobs.

However, one "unpredicted phenomenon" he highlighted is the 9 percent shrinkage in federal government employment over the last year, which translates to a loss of roughly 270,000 jobs. While this drags on short-term data, Peter views it as a long-term positive as these workers migrate to value-creating roles in the private sector.

Rate cuts are coming, likely more than expected

Peter’s track record earns him a seat at the table here: he correctly predicted the number of rate cuts in both 2024 and 2025 when most economists were skeptical. For 2026, he believes the Fed will cut 75 to 100 basis points, likely back-end loaded. With real inflation (excluding shelter) sitting at 2.1 percent, he argues current rates are overly restrictive. He also expects new Trump-appointed Fed governors to push for more aggressive easing.

The CRE disconnect: fundamentals vs. valuations

A key theme of the discussion highlighted the growing disconnect between a resilient macroeconomic backdrop and commercial real estate pricing. Commercial real estate asset values continue to lag pre-pandemic levels: multifamily and office prices have fallen by as much as 30 percent, while retail and hospitality trail by roughly 20 percent.

Peter attributes this not to a lack of demand, but to a temporary supply glut. In multifamily, heavy concessions are masking the reality that we are still roughly 4 million homes underbuilt. As the supply pipeline empties in 2026 and 2027, we expect those concessions to disappear and for occupancy to rebalance.

What’s working in asset classes

• Multifamily: Multifamily is still supply-challenged in fast-growth markets like Phoenix. However, supply-constrained markets such as New York, Chicago, and Detroit are expected to remain in balance.
• Office: Minimal new construction, only 9 million square feet over the next two years, compared to the 100 million square foot norm, is setting the stage for a recovery. Peter’s top picks include Austin, Nashville, San Antonio, San Francisco, and Denver.
• Industrial: Limited supply meets steady growth in Detroit, Cleveland, and Minneapolis.
• Retail: Retail is a quiet winner with virtually no speculative development. Peter likes Philly, Cleveland, and Houston for strong absorption as economic activity returns.
• Hospitality: Foreign tourism, especially from Europe, is expected to spike with the upcoming World Cup. Watch Orange County, Las Vegas, and Boston.

AI: Valuable, but not a "silver bullet"

Peter remains measured on AI’s near-term impact, anchoring his productivity growth expectations at the long-term average of 1.5 percent. He shared a fascinating reminder that technology doesn't always speed up human behavior. Despite job apps and iPhones, it still takes an average of 10 weeks to find a new job, the same as it did in 2004. AI will drive efficiency, but it won't change the nature of the economy overnight.

Bottom line: discipline over exuberance

Linneman’s message for 2026 is grounded but optimistic. He expects rate cuts, improving fundamentals, and sector-specific recovery, but warned against assuming a broad-based resurgence.

“Measured optimism, not speculative exuberance, should guide us this year,” he concluded. For real estate professionals, that means focusing on supply dynamics, tracking policy shifts, and staying rooted in fundamentals.

Want to know more about what Peter predicts? Watch the entire Walker Webcast.