US commercial real estate is finally seeing positive returns after two years of double-digit losses, but significant headwinds remain. A new report from Will Pattison at MetLife Investment Management identifies a 鈥渞econcentration鈥� of demand driven by K-shaped income growth and AI job displacement.
Pattison鈥檚 report suggests five key questions for commercial real estate, and more importantly, some answers.
1. What impact K-shaped incomes and AI?
The top 10% of earners account for 50% of spending, the highest since 1989, while real disposable income growth for the bottom 80% has stagnated. This K-shaped pattern means leasing demand in 2026 will be tied 鈥渢o where high-value employment and wage gains concentrate,鈥� favouring coastal multifamily and select office submarkets.
AI adds a second shock: nearly 50,000 job cuts were explicitly attributed to AI in 2025, with broader estimates ranging from 50,000 to 4,000,000, concentrated in entry-level and administrative roles. The report expects 鈥渁 reconcentration of office demand into markets with deep talent pools and industry clusters,鈥� and warns that performance tied to generic 鈥渞eturn to office鈥� narratives will remain unreliable.
2. How long do multifamily margins compress in the Sun Belt?
Well into 2027.
The report urges 鈥渃aution鈥� on oversupplied markets like 鈥淎ustin, Charlotte, Nashville, Denver, Phoenix and Atlanta,鈥� where aggressive underwriting persists 鈥渄espite elevated vacancy rates and flat-to-negative net effective rent growth.鈥�
3. Is industrial mispriced for growth?
Industrial 鈥渟upply is outpacing demand鈥� with vacancy expected to peak around mid-2026. The report cautions that 鈥減ricing is too aggressive on industrial properties with short-dated鈥� leases, especially as vacancy rises in the southern US, implying those assets are mispriced for growth.
4. Are data centres in a bubble?
鈥淢aybe, but modern portfolio theory has something to say too.鈥� Fundamentally, data centres benefit from 鈥渟trong demand from AI-driven workloads, robust connectivity needs and projected revenue growth of around 7% compound鈥�, with strategic markets like Dallas, Northern Virginia and Chicago offering 鈥渁ttractive pricing鈥�.
Risks include 鈥渢echnological obsolescence and a slowdown in AI funding鈥�, potential oversupply, regulatory hurdles and cost volatility from tariffs and urban site constraints. However, these risks are 鈥渓argely idiosyncratic and not strongly correlated with broader economic cycles鈥�, which makes data centres valuable diversifiers.
5. Why are investor allocations to real estate still shrinking?
Simply performance: the sector delivered -11% in 2022, -10% in 2023 and only 3% in 2024, leaving it well behind equities, explaining shrinking allocations.
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