Principal Asset Management’s Rich Hill On REITs, CMBS and Private Credit

Principal Asset Management’s Rich Hill On REITs, CMBS and Private Credit Hill is the global head of real estate strategy and research at a firm with $107 billion of investments By Brian Pascus August 31, 2026 6:30 am reprintsRich Hill is senior managing director and global head of real estate strategy and research at Principal Asset Management, a firm that oversees $107 billion of global real estate investments across a mix of public and private spheres, mixing equity and debt. Hill handles four quadrants of commercial real estate investments, which he likens to his four children — “I love my four kids for different reasons, but they also frustrate me for different reasons.” The four quadrants are broken into $55 billion in private equity investments in separate accounts and funds for institutional investors; $20 billion in public real estate investment trusts (REITS); $20 billion in private CRE debt; and the rest in commercial mortgage-backed securities (CMBS). Hill sat down with Commercial Observer to discuss the state of public and private real estate markets as we move through the second half of 2026. This interview has been edited for length and clarity. Commercial Observer: What is the main theme with REITs today in the second half of 2026? Rich Hill: We’re really big believers that REITs are leading indicators at cycle turns. They’re leading indicators of both downturns and recoveries. Listed REITs troughed in October 2023. They were up 60 percent since that period of time, on a full-return basis. Private real estate troughs 12 to 18 months later. Private valuations have been up for eight consecutive quarters now, on a total return basis — so for about two years. But the REIT market is beginning to signal something else, which is really important. The REIT market has recently transitioned from recovery into expansion. When valuations go above prior cycle highs, that triggers a signal that we have moved from recovery into expansion. I think that is an extremely important signal that the public markets are sending right now, and one that not a lot of people are following. And the reason I say that is that cycles last a lot longer than what people expect. Cycles last around 16 to 18 years. Recoveries last around two years, and expansions last around 12 years, and downturns last around a year and a half. The public markets, as a leading indicator, are telling us that the commercial real estate market, broadly, is in the very early innings of this cycle. And private real estate valuations will ultimately transition from recovery into expansion. Why is this occurring? I think the markets are finally telling you, for the first time in a while, that predictable earnings and income-driven total returns are a lot more in vogue. And a lot of listed REITs are beginning to participate in a broad-based rally, just as tech stocks and AI stocks pull back. No two cycles are the same, but this has a lot of echoes of the late 1990s and the early 2000s. In the late 1990s, real estate was out of favor because of rising interest rates and the Russian debt crisis and the dot-com crash. Then, lo and behold, in the early 2000s, as the economy was moving into recession, real estate did well. There’s a lot of similarities with today, where REITs and commercial real estate have been out of favor for the past three years. But now that predictable earnings and income-driven total returns are more in vogue, they’re starting to work again. So, we think that if you connect the dots, this cycle is playing out, like you would expect it to from a headline perspective. What’s your thesis on housing in the United States? So the headline reads that the U.S. is underhoused by pick your number — 5 million, 7 million, 8 million — homes, and we think that is mathematically true, but it’s actually the wrong debate. We have a housing mismatch in the United States. We have built too many homes of certain types in some markets, and not enough homes of other types in other markets. That’s a long way of saying that we actually might be oversupplied with conventional Class A apartments in the Sun Belt, for instance, because we built so many of them for so many years. And we’re certainly undersupplied with Class A apartments in the Midwest, and maybe even in the coastal markets. That means if you own Class A apartments, you have to be much more selective about the markets that you’re participating in. And you might be looking to double down in some markets where you don’t own enough product, and you’re lightening up in other markets where you own too much product. So I’m not surprised that there’s megamergers occurring because it makes a lot of strategic sense if you’re looking to optimize your portfolios. What’s going on in the CMBS sphere? First of all, when you think about how cycles play out, distress in the debt markets is a lagging indicator. So, there’s a good chance that CMBS delinquency rates continue to rise and outstanding distress continues to rise. The reason that’s a lagging indicator is because it’s the final stage of the grieving process, which we refer to as acceptance. Banks do not like to resolve distressed loans into a distressed market. They like to resolve distressed loans into a stabilized market. And the reality is borrowers do not give the keys back to the lender until they recognize the past is coming back, and they have to deal with the future. So, believe it or not, rising delinquency rates in CMBS is actually a contrarian bullish indicator. We have been primarily leaning into single-asset, single-borrower (SASB) deals because we think that fits our selectivity thesis, where we can pick the right property types and the right markets, and effectively pick in the capital structure where we want to play. The questions we’re having right now is, believe it or not, office has been a huge trade in the SASB market, and spreads are really tight. Does it still make sense to buy office as SASB? Or should we be focusing on private credit, lending on office? Or should we be buying publicly traded office REITs that are trading at real discounts to replacement costs as a better way to play that theme? And, in the SASB space, could you be moving out to other product types that have not seen as much demand — like retail, for instance? Those are the questions we’re asking. We like office. We think it is effectively liquid, private CRE credit. What’s your private credit business been like? Private CRE credit boomed over the last several years, and there’s been a lot of exposure into multifamily and industrial — rightfully so. So we are increasingly looking away from those asset classes to things like lending on office. We like lending on office because we think we can pick the right building and the right market, and underwrite it at a conservative loan-to-value (LTV). When I’ve spoken to traditional private corporate credit investors in the past, nine times out of 10, they’ve said, “Rich, I understand what you’re saying. Private CRE credit is a great diversifier within my portfolio, because it has lower volatility. But I’m not interested in talking about that, because if you’re not going to give me greater liquidity and you’re going to reduce my return, I’ll just stay with private corporate credit.” But I believe that there is a small shift in sentiment, not because people think the bottom’s gonna fall out on private corporate credit. It’s likely not going to. But, if returns are going to be different in the next 10 years as they were in the past 10 years, the way you optimize portfolios changes. If you think your private credit return’s gonna be 10 percent, not 15 percent, then maybe you start valuing lack of volatility a little bit more. What do you think is attractive about private CRE credit? Two things. The risk-adjusted returns are compelling, because you’re underwriting at conservative LTVs on valuations that have already fallen 25 percent on average. So, for a loan to take a loss, going forward, it has to have a pretty draconian outlook. The second point that we think is just really misunderstood, though, is the stability of returns. Since 2014, as measured by the NCREIF aggregate indices [National Council of Real Estate Investment Fiduciaries that tracks CRE fund performance], there has not been a single quarter with negative returns. That’s a big statement. I’m talking about COVID. I’m talking about the drawdown. So why has there not been a negative total return? Well, these instruments are driven by income. Income is around 90 percent of total returns, and that just powers through. So we like it. But I want to be clear on something that I don’t think is talked about enough: It’s not always gonna be puppy dogs and rainbows for the private CRE credit market. It’s just not gonna be that either on a property-by-property basis, or a loan-by-loan basis. And the reason I bring that up is, it’s really easy to get people money. It’s really easy to provide a loan. Everyone will take cheap money. But to be a really good private CRE credit investor, you need to know how to service that loan over time. You need to know how to specially service that loan when things inevitably go bad — and, by the way, you probably need to know how to own that property, if you have to. There’s not many private CRE credit investors that actually have the ability to do that. How do you view this current CRE recovery? The last recovery we had was a V-shaped recovery, and that felt pretty good, because the Federal Reserve was throwing an unprecedented monetary stimulus at the market, and bringing interest rates down. So, in reality, the last time we’ve had recovery like this was more than 30 years ago in the 1990s. And this feels like a shock to the system. Because it’s neither a broad-shaped recovery, or a broad-based expansion, or downturn, or a V-shaped recovery. This cycle’s different. This cycle isn’t as much about picking the winners as it is avoiding the losers. And so it leads us to not have a lot of tremendous pound-the-table conviction on any one property type. But we also don’t redline any single property type. It’s exactly why, when we think about housing strategies, we think the best preferred way to play housing is a diversified strategy, where you select something like Class A, but you also like build-to-rent, you like student housing, you like senior housing, you like manufactured housing. It allows you to pick the markets and figure out where other things are different. We think this is a tremendous alpha opportunity. But if you asked me, in 10 years’ time, what people thought about this commercial real estate cycle, I bet you one person would say, “It was great. I made a ton of money.” I bet you another person would say, “I did just OK,” and I wouldn’t be surprised if a third person said, “I underperformed, it didn’t work very well.” This is just going back to basics, where you have to pick the right property types in the right markets and operate those properties. That’s pretty exciting. But it is going to create a tremendous amount of alpha where there will be winners and losers in this market. Brian Pascus can be reached at bpascus@commercialobserver.com.