Now Is the Time to Buy in Commercial Real Estate: Morgan Stanley

Despite a bumpy economy and increasingly high Treasury yields, one global investment firm believes now is the time to pounce on U.S. commercial real estate. 

Commercial Observer spoke with Tony Charles, global head of research and strategy at Morgan Stanley Real Estate Investing, who outlined the main takeaways from Morgan Stanley Investment Management’s mid-year 2026 real estate outlook. 

After a four-year recession, commercial real estate is now being repriced, giving investors a chance to acquire prime assets at low prices; supply is down across the board; and megatrends in AI, global supply chains, and aging demographics have opened up attractive entry points into infrastructure, retail and senior housing. 

“We certainly believe we’re entering the next up-cycle for real estate. It’s an attractive entry point,” Charles told CO in a Thursday interview. “And, given the repricing that’s now below replacement costs, we’re pretty confident in the next vintage of real estate investing.”

Charles argued that the recent U.S. real estate downturn — which began in mid-2022 amid the Federal Reserve’s policy U-turn to hike interest rates coming out of COVID-19 — created “the longest downturn for real estate since the 1980s and early 1990s,” and that four years later, pricing is still down an average of 20 percent across the board. 

But he noted that “supply is down dramatically, so that’s obviously very helpful for real estate,” and that a strong structural macroeconomic backdrop — U.S. GDP grew 2.1 percent year-over-year in the second quarter of 2026 — has provided “a lot of green shoots that are beginning to show through.”

He pointed out that CRE transaction activity increased 23 percent year-over-year in the U.S., institutional capital raising is up nearly 40 percent on the year, and that CRE debt originations are up around 20 percent year-over-year. 

Counterintuitively, Charles and Morgan Stanley Investment Management argued that there is a misperception that real estate performs poorly in high rate environments. In fact, the industry struggles when rates are actually going up — but since rates have been so high for so long, the market has adjusted to them. 

“Cap rates have already been adjusted, so provided the higher rate is due to higher growth and demand-driven inflation, fundamentals actually do pretty well,” said Charles. 

The Morgan Stanley mid-year report noted that the Federal Reserve, under new chairman Kevin Warsh, has shifted its priorities back to inflation from unemployment, and has held rates high in the near term amid expectations of further rate hikes so long as inflation remains a problem. 

“The other, sort of side benefit of higher interest rates is it can stress the capital structures of property owners,” said Charles. “So it is gonna force some sellers to recapitalize their assets, and that does create opportunities to acquire high-quality assets at lower prices.” 

The Morgan Stanley report emphasized that since the 1970s, commercial real estate has “generated total returns above inflation in five of the seven high inflation periods,” with the outperformance mainly derived from the positive returns generated by low supply across the board. 

“Today’s environment mirrors several of these moderate demand-pull/cost-push environments, where elevated construction and financing costs should continue to slow new development, tighten future supply and ultimately support rent growth and value appreciation in existing assets,” wrote Morgan Stanley. 

Charles told CO that with no supply, occupancy will continue to tighten, leading to stronger rent metrics for owners and investors. 

“And there’s no real reason why supply is going to jump back because you still have elevated construction costs,” he said. “You have elevated financing costs. It’s just harder for developers to pencil construction projects given that backdrop.” 

Finally, the Morgan Stanley mid-year report zeroed in on three select sectors: industrial, retail and senior housing. 

Charles pointed to mega trends connected to broader deglobalization amid an increasingly multipolar world. That has led, he said, to “a complete reorganization of global supply chains” that began six years ago during COVID-19 and that has quickened since Russia invaded Ukraine and Iran closed the Straits of Hormuz following the U.S. military bombardment.

“Companies are trying to build more supply chain resilience, but they’re also bringing back manufacturing of critical goods,” Charles said, emphasizing this is where industrial comes into play. “We’re not talking about manufacturing apparel or footwear. This is aerospace, high-tech manufacturing, biopharmaceuticals. This is stuff that the U.S. wants to bring back because it’s strategically important to the country.” 

To this end, he noted that the AI space is inextricably linked to industrial. There are still several ways to play the industrial sector that have more downside risk protection built in than simply data centers, which has become a political football with lots of debt attached, Charles said.

“One of them is on the physical AI side, advanced manufacturing — things like drones, robotics, autonomous driving, that sort of physical adoption of AI,” he said, citing that industrial rents in Silicon Valley have increased 45 percent in three years. “AI is a massive sign to e-commerce — think about Instagram, social media pushing ads to people, that stimulates more e-commerce transactions. E-commerce is growing 12 percent per annum.”

But no sector is ripe for more investment activity than senior housing, according to Morgan Stanley, which noted the 80-plus age cohort is expected to grow at 5 percent each year through the end of the decade, all while new supply of senior housing lags behind.  

“[The Baby boom generation] is where all the population growth is and it’s where all the wealth is concentrated, so we think it’s a very strong growth sector,” said Charles, who added that senior housing net operating income has grown 7.5 percent per year since 2021, compared to multifamily’s 1.5 percent growth. 

“It’s a high-convection sector for us,” he said. “It’s got a lot of demand side growth, and you have the pullback in supply as was iterated earlier.” 

Brian Pascus can be reached at bpascus@commercialobserver.com.