Core Portfolios Shift in Rare Rate-Driven Downturn

Core Portfolios Adjust to Rate Pressures

The commercial real estate sector is emerging from an unusual rate-driven downturn, according to J.P. Morgan Asset Management’s core portfolio chief, Josh Myerberg. Globe St reports that core portfolios are valued at $79B. Myerberg says this reset differs from past cycles because sharp increases in policy rates are directly driving asset repricing. ODCE index data shows returns have hovered near the bottom, reliant largely on income instead of appreciation.

Why the Core Downturn Is Different

Historically, core real estate downturns were fueled by oversupply and excess leverage. This time, Myerberg notes, higher interest rates have been the dominant force. Unlike previous cycles, real estate returns have closely tracked rate movements, making this downturn exceptional. This correlation suggests fundamentals remain solid and that pending Fed cuts, with consensus estimates for more in 2026, could drive a recovery in core portfolios.

Renewed Focus on Quality and Income Growth

As rates normalize, sector-wide outperformance is giving way to greater dispersion among asset types and locations. Myerberg expects investors to seek established core funds with long-held, high-quality properties in desirable markets. The flight to quality will drive capital toward seasoned funds and listed REITs, moving away from opportunistic, yield-driven bets in riskier segments. Market data shows ODCE redemption queues shrinking, hinting at renewed interest in core vehicles. This shift is also being echoed in the multifamily space, where both core and value-add strategies are seeing renewed momentum following the latest Fed rate cut, suggesting a broader investor recalibration across asset classes.

Rethinking Yield and Secondary Markets

Core portfolios will see more selective capital allocation, especially in secondary markets. Myerberg cautions that simple yield premiums may not deliver lasting returns; sustained NOI growth in supply-constrained areas is now key. In a market where cap-rate compression is uncertain, underwriting must prioritize the durability of tenant demand and embedded income growth—hallmarks of resilient core portfolios.

Strategic Positioning for 2026

As conditions improve, core managers are expected to focus on incremental asset management and tenant retention. Large-scale sector shifts are less likely. Portfolio positioning reflects the view that policy rate volatility will ease and valuations will recover gradually. External shocks are still possible. However, long-term demand for core portfolios remains strong among global investors seeking safety, income, and diversification.