Commercial Real Estate Recovery: Where the Opportunities Are | Rich Hill, Principal
Rich Hill from Principal Asset Management discusses the commercial real estate recovery, emphasizing that opportunities exist across all property types but with significant dispersion in returns. He identifies selective opportunities in multifamily housing, built-to-rent, senior housing, power centers, and top-tier office properties, while cautioning against broad-based investments in Class A apartments and Class B/C office due to white-collar employment risks from AI.
Summary
Rich Hill, Senior Managing Director and Global Head of Real Estate Research and Strategy at Principal Asset Management (which manages $110 billion in global commercial real estate), discusses the current state of the commercial real estate cycle. He emphasizes that CRE has moved from downturn into recovery, with total returns increasing for eight consecutive quarters. Hill explains that real estate cycles average 16 years, consisting of approximately two-year recoveries, 12-year expansions, and 18-month downturns, with income returns being underappreciated drivers of long-term returns.
A central theme is the significant dispersion in property performance across markets and types. While headline returns appear muted, top-quartile properties are performing well while bottom-quartile properties show little recovery. Hill argues this dispersion matters more in the current environment than in prior cycles because investors have forgotten how to navigate selective investing. He emphasizes this is not a thematic investing environment like 2010-2020 but rather requires selective conviction and avoiding losers alongside picking winners.
On housing, Hill addresses the common narrative of an 8 million unit undersupply, arguing instead that the U.S. has a housing mismatch rather than true undersupply—too many of certain types in some markets and too few of other types in others. He recommends selectivity on Class A apartments, which may underwhelm due to tight cap rates, but sees value in higher-quality Class B apartments bought at the right basis and below replacement cost. He is bullish on built-to-rent as a solution to housing affordability, noting that regulatory frameworks still preserve institutional investor participation. Senior housing presents strong demographic tailwinds from the aging baby boomer population, with only two U.S. population cohorts currently growing: those over 70 and those aged 35-50.
On retail, Hill notes that the lack of new supply construction during the retail apocalypse (2010-2020) and COVID created a right-sizing effect, resulting in high occupancies and rent growth potential. However, he restricts the institutional buy box to only 5-10% of the 115,000 retail properties in the U.S., preferring unanchored and power centers over grocery-anchored or community centers due to better cap rates and NOI growth potential.
Regarding office, Hill rejects the notion of a broad office crisis, instead identifying a Class B and C office problem. He cites statistics showing 60% of office vacancy is concentrated in 10% of buildings, while 40% of office buildings have zero vacancy. New, high-quality office buildings remain well-positioned and may deliver best-in-class returns over 10 years, though conversion challenges limit alternatives for lower-quality stock.
Hill addresses AI's impact on commercial real estate, noting uncertainty about whether it will upscale, downscale, or outscale employment. He argues the market overestimates near-term impacts while underestimating long-term implications, and that not all markets will be negatively affected—San Francisco, for example, is experiencing office and multifamily booms. He recommends caution on Class A apartments due to potential white-collar unemployment risks.
A key theme throughout is properties trading below replacement cost, which provides both a valuation safety net and signals opportunity for NOI growth as rents push properties toward replacement cost levels. This dynamic explains the lack of new supply development. Hill concludes by addressing the elephant in the room: 10-year Treasury rates above 5%, which some view as scary but which he frames as a return to historical normalcy. He argues that while the 2010-2020 low-rate environment was abnormal, commercial real estate functioned successfully in 4-5% rate environments historically and can again if investors focus on maximizing NOI growth and higher-return properties.
About this episode
Commercial real estate has moved from downturn to recovery, but the gains are uneven. Rich Hill of Principal Asset Management joins Michael Bull, CCIM to map where the opportunities are. Rich Hill is Senior Managing Director and Global Head of Real Estate Research and Strategy at Principal Asset Management, which manages roughly $110 billion of commercial real estate globally. He explains why US total returns have risen for about 8 consecutive quarters, why real estate cycles average around 16 years, and why net operating income growth will drive returns in a cycle with little room left for cap rate compression. Beneath muted headline returns, the top quartile of properties is performing well while the bottom quartile has failed to launch. Rich walks through the US housing mismatch and a selective view on Class A apartments, build-to-rent under the ROAD to Housing Act, senior housing demand from the growing 70+ population, and why power centers and unanchored retail look attractive. On office, 90% of vacancy sits in 30% of buildings and 40% of buildings have no vacancy at all. With the 10-year Treasury above 5%, Rich and Michael discuss why properties trading below replacement cost are holding back new supply, and why commercial real estate worked for decades with Treasury rates at 4% to 5%. In this episode:00:00 Where Are the Commercial Real Estate Opportunities?01:32 CRE Recovery: 8 Quarters of Rising Returns and 16-Year Cycles03:48 Muted Headline Returns and the Dispersion Underneath06:28 Selective Conviction and the US Housing Mismatch08:35 Class A Apartments, Class B Value-Add, and AI Job Risk09:55 Build-to-Rent and the ROAD to Housing Act10:59 Senior Housing: The Growing 70+ Population12:01 Retail Real Estate: Power Centers and Unanchored Centers14:13 AI, White-Collar Jobs, and the Office Market16:40 Below Replacement Cost: Why New Supply Has Stalled18:37 Investing With a 5% 10-Year Treasury19:46 Back to Normal: CRE at 4% to 5% Treasury Rates Connect with Rich Hill:https://www.linkedin.com/in/richard-hill-2156387/Principal Asset Management Website: https://www.principalam.com Connect with Michael Bull & The Show:Michael Bull, CCIMBull Realty, Inchttps://www.linkedin.com/in/michaelbull/ For more commercial real estate market data, sector forecasts, and video episodes, visit CREshow.com. America's Commercial Real Estate Show is brought to you by our proud sponsors. TCN Worldwide: Commercial real estate property management, leasing, and sales solutions across the US and globally. Learn more: https://www.tcnworldwide.com Build Out: The ultimate product suite for commercial real estate brokerage firms looking to streamline their business. Learn more: https://www.buildout.com Bull Realty: Regional commercial real estate brokerage services headquartered in Atlanta, delivering market intel and strategies. Learn more: https://www.bullrealty.com Commercial Agent Success Strategies: Twenty-one cloud accessed commercial broker training videos with slide deck action notes. Learn more at https://www.commercialagentsuccess.com/ #CommercialRealEstate #CRE #CREOutlook #RealEstateInvesting #Multifamily #BuildToRent #RetailRealEstate #OfficeMarket #SeniorHousing #InterestRates #PrincipalAssetManagement #CREShow
Key Insights
- Hill argues that the U.S. has a housing mismatch rather than an undersupply, meaning too many houses of certain types were built in some markets while others lack supply, which invalidates broad supply-growth strategies and requires geographically selective approaches.
- The speaker claims that significant dispersion in property returns across markets and types creates an environment where investors must actively avoid losers alongside picking winners, unlike prior cycles where broad-based expansion made property selection less critical.
- Hill contends that 90% of office vacancy is concentrated in just 30% of buildings, and top-quality office properties may deliver best-in-class returns over 10 years, meaning the sector has a Class B and C problem rather than a systemic office problem.
- The speaker argues that properties trading below replacement cost provide both a valuation floor and a signal that rents can grow to replacement cost levels, which simultaneously explains why new supply construction has stopped and creates opportunity for NOI growth.
- Hill asserts that while 5% Treasury rates may feel concerning, this represents a return to historical normality rather than crisis conditions, and commercial real estate successfully operated in similar rate environments during the 1980s-1990s by focusing on fundamentals and NOI growth rather than cap rate compression.
Topics
Transcript
Welcome to America's commercial real estate show your source for market Intel forecast and strategies hello I'm Michael Bull thank you for being with us our show today is brought to you by TCN worldwide if you're you're looking for brokerage services for acquisitions, dispositions, management, site selection, whatever, anywhere in the world or in the U.S., check out tcnworldwide.com. Well, let's get to our show today. I think one of the things we're, in our industry, we're always thinking about, we're always looking for, is the opportunities. You know, where are the opportunities? And one reason I think a lot of people love this show is we're looking at different, talking to different economists and analysts and business leaders…
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