Global real estate outlook mid-year update

When we set out the six forces reshaping commercial real estate for 2026, we anticipated a year of steady improvement: positive growth across most major economies, easing trade tensions, moderating inflation and a gentle decline in interest rates. Half a year on the path has proved far rougher than anyone foresaw.

The single event we could not have factored in was the eruption of conflict in the Middle East and the closure of the Strait of Hormuz — one of the world's most important shipping chokepoints. As of end-July, there remains hope that an agreement to end the conflict and fully re-open the Strait will still be negotiated before the economic consequences accumulate too severely. For now, we expect somewhat lower growth, higher inflation, and a change of direction in interest rates from what we were anticipating at the start of the year, and that these effects prove temporary and reversible. If the conflict continues, our base case of a recovery to a pre-conflict trajectory by early 2027 could prove unachievable.

In addition, trade friction has not disappeared, it has simply been displaced from the front of our minds. It will move back into focus in the second half of the year. Running beneath all of this is the continued and faster-than-expected acceleration in the capability and adoption of artificial intelligence. Our latest research shows AI is segmenting markets, not moving them uniformly, meaning the impact on jobs and real estate is more complicated – and more positive – than the ‘fear-trade’ the AI-driven mass job displacement narrative suggests. (See our research Where AI is changing jobs and what it means for real estate).

In our view, the six forces remain the right lens through which to read the year; what has changed is their intensity, their sequencing, and the speed at which some of them have arrived.

Cost management was already the top concern of corporate real estate leaders heading into 2026. The energy, commodity, and freight shock arising from the war has pushed cost management from a priority to the primary decision driver. Higher fuel, materials and logistics costs feed directly into operating budgets, drive up fit-out and construction costs and erode project timelines, leaving little slack anywhere in the system. Fit-out costs rose by as much as 10% in London and Seoul and 8% in New York in local currency from Q1 2025 to Q1 2026, with further increases anticipated through the rest of 2026 as global economic shocks drive construction cost inflation upwards (see the Global fit-out cost guide), and uncertainty drives higher tender prices amongst contractors and sub-contractors in many regions. Energy and utility costs, the top concern for occupiers (Future of Work 2026), are likewise impacted by energy price increases and shipping disruption, exacerbating an already challenging operating environment.

The disciplines we identified to supercharge cost management — interrogating budgets, optimizing space utilization and improving operational efficiency — have not changed, but the pressure behind them has intensified sharply.

The development pipeline was already thinning for many property types in mature markets, held back by economic uncertainty and high build and finance costs. The rapid acceleration in construction costs since the outbreak of war in the Middle East has made new schemes even harder to justify, pushing starts lower still. The result is a deepening shortage of quality space in many markets and a widening gap between prime and secondary stock. That said, well-located secondary stock will continue to benefit from spillover demand in markets with the shallowest new supply pipelines and continued strong tenant demand, such as London, New York, and Tokyo.

The shortages of new supply also strengthen the case for repositioning and retrofitting existing assets, where faster timelines and lower embodied carbon now sit alongside a more compelling cost argument.

This force is largely unchanged, and that is itself worth noting. It is structural and demand-led, rooted in how people choose where to live, work and spend their time, and it has not been knocked off course by the macro turbulence. If anything, a more cost-conscious environment raises the bar: experience now has to demonstrably earn its place by driving employee retention and performance, and consumer footfall, rather than being treated as a discretionary extra.

Our Future of work survey 2026 confirms the pattern is hardening, not fading. 66 percent of organizations show a preference for AI-enabled buildings over basic building management; 62 percent would prioritize building quality and amenities over prime location; and while technology and reliable infrastructure are seen as core productivity drivers by CRE leaders and C-suite, workspace experience remains a key enabler of cognitive performance. Over 70% of both office and frontline employees agree that the workplace contributes to their productivity.

A plurality of occupiers go further, naming hospitality-grade, AI-enabled buildings as one of the scenarios most likely to transform their portfolio over the next three to five years with three-quarters of these companies already acting on this intention. North America is ahead of the global average, indicating that firms in the region are not waiting for the business case to firm up before they actively implement and embed this strategy.

This is where the picture has moved fastest. The "pilot fatigue" we expected, while true, has given way to something more consequential. Agentic AI has started decoupling the longstanding link between output growth and headcount growth for knowledge work, raising fundamental questions about the long-term trajectory of space demand, particularly for offices.

The answer is nuanced. The theme is divergence, not reduction. The net labor impact from AI for any given market is a function of how three forces combine: role augmentation, selective displacement and job creation. The proportion of the three is largely defined by a market’s industry composition and employment structure.

On the AI adoption front, 42% of companies polled in our Future of Work Survey 2026 have moved past the initial pilot stage, but only 15% have progressed on AI-driven organizational change. Most companies still struggle to track real ROI from their AI investments, making cost of adoption an increasing concern.

The industry is facing a phase of both risk and opportunity as the AI transformation plays out - three of the top four challenges to commercial real estate portfolios are technology-related: cyber security and data privacy (47% of respondents); AI disruption (41%); and uncertainty of AI impact on space requirements (40%).

But as our research Where AI is changing jobs and what it means for real estate points out, AI is not operating in a vacuum; the confluence of multiple factors, in particular supply conditions, asset quality, the macro context and AI, all impact workforce and property performance.

The convergence of buildings with energy systems was always one of our medium-term themes. The current energy crunch has pulled it forward. Reliable, affordable power has shifted from a future consideration to an immediate one, and energy security and cost reduction now sit near the top of the agenda for owners and occupiers alike. Indeed, ‘energy efficiency to mitigate rising energy costs and grid constraints’ was one of the top five key priorities for C-Suite leaders according to our Future of Work Survey.

Rising electricity demand and more concentrated loads, from data centers, advanced manufacturing, and EV charging, are facing power grids meant for slower, more stable demand. This is creating a binding constraint on growth. Lengthening interconnection timelines, congestion and uncertainty are turning access to power into a gating factor well before development or leasing decisions are being made. This shift is already visible in capital deployment. Global energy transition investment reached a record $2.3 trillion in 2025, more than double 2020 levels. Grid-scale clean energy now accounts for the majority of new generation, though uneven regional build-out is creating mismatches between where new power is added and where power-intensive demand is growing. Onsite generation is emerging as a necessary complement around these constraints, with commercial distributed energy resources (DERs), from rooftop solar to onsite storage, growing fivefold between 2020 and 2025. (See our research, Where energy meets property).

In decades past, commercial real estate investing has been the domain of institutional investors, real estate operating companies, family offices and high-net-worth individuals. Capital and financing requirements, operating experience, and market barriers to entry have favored experienced and well-capitalized investors.

However, regulatory changes, new technologies, increased personal wealth and increased education about real estate are paving the way for increased private wealth to flow into commercial real estate.

Geopolitical and cyclical factors in the first half of this year have done nothing to change this structural trend. The relevant dynamics play out in years, not months. Continued improvement and increased stability across the real estate capital markets have helped a reinvigoration of real estate investing play out in H1. Bid-ask spreads have stabilized, signaling improved pricing clarity, and bidding pools have deepened as investors return to real estate’s compelling value proposition. According to our Global Credit Intensity Index, a hyper-competitive debt market, with lenders competing on terms and driving up LTVs to win business, is creating opportunities for experienced and new investors to gain exposure to the sector.

The forces we identified in December remain the right ones — the year has simply made some of them more urgent than we could have known.

For investors, close market monitoring and understanding nuanced sector and market dynamics will help spot opportunities as they emerge — waiting on the sidelines risks missing the window of opportunity. As operating conditions continue to evolve, investor strategies should adjust with a sharper focus on income growth as the key driver of asset performance.

For occupiers, disruption is no longer episodic, it's the everyday reality. With AI's impact on the workforce, energy security, supply chains and economic conditions all difficult to predict with any degree of certainty, scenario planning shouldn't be a periodic exercise; it should be built into organizational strategies. Those able to develop resilient and agile operating models will be best placed to meet their goals regardless of changing conditions.

To find out more about the latest trends and real estate market prospects by geography and sector, read our latest Global real estate perspective.