We hope you enjoyed the holiday season with family and friends.

We’ve been extraordinarily fortunate at Pathfinder as we approach our 20^th anniversary. Throughout our company’s history, we have embraced giving back to our communities with our time and resources. We hope that you have been able to do the same over this past year.

It’s time for our predictions for this coming year, 2026.

Employment Growth: Mixed Signals

Wall Street stalwarts J.P. Morgan and Goldman Sachs provide some mixed messages on employment growth next year. J.P. Morgan predicts unemployment to peak at 4.5% in the first half of the year. Michael Feroli, their chief U.S. economist noted that the labor market slowdown should reverse course later in 2026, based on three potential pillars of support for the economy:

1. Tariffs. He thinks the Administration settles on a more consistent tariff program in the future.
2. Tax Benefits. The tax breaks in the Big Beautiful Bill should boost disposable income in the first half of 2026.
3. Rate Cuts. He believes that we will see three interest rate cuts next year – in January, May and December.

While Goldman’s December forecast noted strong global Gross Domestic Product (GDP) growth of 2.8% (versus a consensus forecast of 2.5%), they expect the U.S. to outperform the global average because of reduced tariff drag, tax cuts and easier financial conditions. They also forecast unemployment to peak at 4.5%, but do not see a meaningful decline from there anytime soon.

Housing Sales and Pricing: Better Times Ahead? Lawrence Yun, chief economist at the National Association of REALTORS®, is forecasting a 14% increase in home sales for 2026, following a tepid 2025. New home sales are also projected to rise by 5% next year.

“Next year is really the year that we will see a measurable increase in sales,” Yun recently told attendees at the Residential Economic Issues and Trends Forum in Houston.

“Home prices nationwide are in no danger of declining,” he said. NAR expects prices to climb 4% in 2026, supported by job growth and persistent supply shortages.

Yun has historically been optimistic about housing prices over the years. He infamously predicted that 2008 would be a strong year for home sales price growth after the market began falling in 2007. Missed that one by a bit, Lawrence.  He’s been predicting price growth every year since.

Redfin and Zillow were both a bit more muted in their 2026 forecasts. Redfin noted that persistently high mortgage rates combined with high existing home prices will limit price increases to about 1%. Zillow’s forecast is similar, at 1.2%.

Our friends at John Burns Research and Consulting summed it up well. Wage growth still has a long way to go to catch up to the spike in mortgage payments. They noted that mortgage payments jumped 82% in the past five years, while income rose only 26%.

"That is a huge problem," John Burns said. The only way to close the gap is for there to be a huge increase in income, a big drop in home prices and mortgage rates, or a combination of the three.

Mortgage Rates: A Slow Drift Downward

Mortgage rates remain one of the biggest constraints for buyers. After sitting around 7% at the beginning of the year, the 30-year fixed rate averaged 6.18% at the end of December, according to Freddie Mac.

Yun (the optimist) expects gradual improvement ahead. “As we go into next year, the mortgage rate will be a little bit better,” Yun said. “It’s not going to be a big decline, but it will be a modest decline that will improve affordability.” He forecasts rates to average around 6% in 2026, a modest decrease from where we sit today.

While the Federal Reserve initiated three rate cuts in 2025, predictions are for the Fed’s pace of cutting to subside in 2026. And mortgage rates are influenced by a wide array of factors, including inflation, Treasury yields, and federal borrowing – so buyers shouldn’t bet on 4% or even 5% rates to return. Still, even minor decreases in mortgage rates could result in an uptick in buyer activity.

There is also a downside to declining mortgage rates. Any anticipated drop would suggest a weaker job market, less consumer spending and cooling inflation. Rising unemployment hurts home sales – but the way the government chooses to respond will also factor in. If the economy shows further signs of weakness, you could see a more dramatic decline in rates, which could result in a larger increase in home sales, even in a weaker economy.

Interest Rates: Caution is the Word

More important to the commercial real estate sector is the magnitude of rate cuts by the Federal Reserve. I listened to Fed Chair Powell’s comments after the December meeting. My summary word from that press conference: “caution.” Not surprisingly, predictions are all over the board, notwithstanding that Chair Powell’s tenure ends in May and a new Trump appointee will most assuredly favor additional rate reductions. The CME Fedwatch tool, which calculates probabilities of Federal Open Mark Committee meeting outcomes, currently shows the following ends for rates at the end of 2026:

Our current prime rate of interest is 6.75%. My best guess is for two or three 25-basis point cuts in 2026, bringing the prime rate to between 6.00% to 6.25%.

Apartment Vacancy and Rent Growth: Better Times Ahead

The two have an inverse relationship. Across our markets, the outlook for 2026 is steady recovery as the supply of new apartment deliveries decline, absorption improves and rent growth accelerates again after a few years of minimal, or in some markets, negative growth. As Mitch Siegler and I have both written over the years, the gap between the cost of renting an apartment and buying a home remains extraordinarily wide. Even as home prices in some markets have fallen (slightly), owning remains far more expensive, supporting strong rental demand (and low vacancies and rent growth).

Merger and Acquisition Activity: Gonna Be Fun Again

We’ve been waiting for this to increase since the 2024 election. I believe that time has now arrived. Some notable predictions from a few pundits:

"Private Equity deal volume snaps back hard." — Paul Aversano, Alvarez & Marsal

"Expect gradual middle market M&A recovery in 2026, driven by private equity deployment, eventual exit activity and continue strength in large cap dealmaking.” — Capstone Partners

"2026 will be the year of middle-market M&A mania, fueled by pent-up sponsor demand and a reset in valuation expectations." — Matthew Wiener, Aon Transaction Solutions

We live in interesting times, and times that make these types of predictions that much more challenging. Let’s all hope for the best this coming year. Approach the new year with resolve to find the opportunities hidden in each day.

Lorne Polger is Senior Managing Director of Pathfinder Partners.  Prior to co-founding Pathfinder in 2006, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group. He can be reached at lpolger@pathfinderfunds.com.