📢 Good morning,

U.S. commercial real estate faces a mounting backlog of distressed loans. CMBS delinquency rates hit 7.29% in August 2025, the highest since the pandemic, with office delinquency at 11.7% and multifamily at 6.9%. Yet distressed sales remain under 5% of transaction volume this year, far below the 20%+ peak during the GFC. Lenders are leaning on maturity extensions, note workouts, and “extend-and-pretend” strategies, keeping assets off the auction block.

Loan Performance
The rise in delinquencies is driven by maturities colliding with elevated rates. One-third of CMBS loans are not paying off at maturity, forcing extensions. Office loans are deteriorating fastest, with NOI erosion from persistent vacancies. Multifamily stress stems from oversupply and slower rent growth. Unlike 2008, regulators allow banks to avoid mark-to-market writedowns, enabling forbearance. Special servicers are managing defaults by structuring reserves and partial paydowns rather than moving collateral to REO.

Demand Dynamics
Tenant demand is bifurcated. Class A office retains some leasing momentum, but secondary assets face long downtimes. In multifamily, leasing is solid but weakened by excess deliveries. Hospitality and retail show resilience, keeping distress modest in those sectors. This uneven demand means distress pressure is not uniform, reducing the system-wide spillover that could otherwise force liquidations. Investors expecting uniform capitulation are misreading tenant fundamentals.

Asset Strategies
Owners of distressed properties are aggressively cutting opex, offering concessions, and renegotiating leases to buy time. Office landlords are deferring capex and prioritizing occupancy over rent growth. Multifamily sponsors are injecting equity alongside agency refinances. Opportunistic capital is engaging through preferred equity and note purchases instead of outright property sales. The strategic focus has shifted from foreclosure arbitrage to creative recapitalizations that preserve asset control.

Capital Markets
Debt markets remain tight, with banks sizing loans to debt yields of 10–12% and LTVs near 50%. Cap rates are split: quality assets can trade at stabilized yields close to pre-correction levels, while lower-tier assets are functionally unpriceable. Private credit funds and PE dry powder buffer against mass liquidation by stepping in with rescue capital. However, the spread between buyer and seller expectations remains wide, freezing transactions. Liquidity is selective, not systemic.

🛠 Operator’s Lens

The distress backlog is likely to build into 2026. As extensions expire and valuations adjust downward, banks may release more loans for sale. Expect an incremental rise in distressed trades, but not a systemic flood.

Regulatory guidance could evolve, either prolonging extend-and-pretend or nudging banks toward resolution. New appraisal resets, particularly for offices with sustained vacancy, will pressure both borrowers and lenders, forcing recognition of losses.

Capital formation is already shifting toward structured vehicles to absorb distress. Expect joint ventures between banks and PE firms or resolution-style funds. Ultimately, sentiment may be the turning point: when owners and lenders accept lower values, bid-ask spreads will compress, unlocking transaction flow. The thaw will be gradual, sector-specific, and likely extend through 2026–27.