📢Cottonwood Group closed a $1B special situations fund, doubling its initial $500M target, to capitalize on the looming $2T wave of CRE loan maturities through 2027. Backed by global institutions, the Los Angeles firm is already deploying capital into loans with equity conversion rights, aiming for distressed control positions. With $591B of potentially troubled debt under today’s rates, the strategy bets on bank pullback, high financing costs, and forced recapitalizations
Fund size: $1.0B (vs. $500M target)【6†source】
Already deployed: ~$300M【6†source】
IRR achieved: 20% to date【6†source】
CRE loan maturities: $2T by 2027【6†source】
Potentially troubled debt: $591B (≈30% of total)【6†source】
Peak maturities: 2025 ($1.0T) and 2027 ($1.26T 【6†source】
Loan Performance
The $2T maturity wall represents both systemic risk and structured upside for distress buyers. Many loans originated at 3–4% rates now face refinancing costs near 8–10%. With DSCR compression, even stabilized properties fall short of lender hurdles. Cottonwood’s debt-with-equity-kicker structures position them to assume control on default, converting temporary cash stress into long-term equity gain.
Demand Dynamics
Distress isn’t spread evenly. Multifamily and industrial continue attracting refinancing liquidity, but transitional office and over-levered retail dominate the at-risk pool. Markets with job and population growth may find recapitalization partners, while obsolete offices in secular decline will see workouts tilt toward ownership transfers or discounted debt sale.
Asset Strategies
Rescue capital terms are stringent. Loan-to-value sizing rarely exceeds 60%, with interest reserves baked in. Investors demand 20%+ IRR, achievable only through steep discounts or value-add repositioning. For operators, even short-term lease boosts or NOI stabilization can tilt negotiations in their favor, underscoring the tactical importance of occupancy management ahead of refinancing.
Capital Markets
Traditional banks and CMBS conduits have withdrawn from high-risk categories, pushing rescue capital costs to SOFR + 800–1000 bps. Mezzanine coupons sit in the mid-teens. Against this, opportunistic funds raised $30B+ in 2024–25, but that remains small relative to the $591B troubled debt pipeline. Cottonwood’s billion-dollar close highlights how institutional capital is repositioning to fill that gap.
$2T CRE maturity wall through 2027 is a generational test.
$591B of loans at risk underwrites Cottonwood’s “loan-to-own” playbook.
Banks’ retreat cements private equity as primary distress capital.
20% IRR is today’s benchmark for distressed return hurdles.
🛠 Operator’s Lens
If facing maturities, bolster NOI quickly—short leases or renewals can improve refinancing odds.
Expect tough deal terms: 60% LTV caps, equity give-ups, oversight covenants.
Transparency with distress funds builds credibility in underwriting.
Prepare for joint ventures, preferred equity, or outright title transfer as exit paths.
CRE distress will accelerate into 2025–2027 as maturities crest. Distress funds will shape valuations, forcing quicker price discovery as banks offload loans rather than extend indefinitely. For well-located properties, recapitalization with rescue capital is feasible, but obsolete assets may have no lifeline.
Institutional capital from Asia and pensions suggests distress is seen as a safe high-yield allocation, even amid broader market volatility. The real test will be execution speed: funds with dry powder can dictate terms in a compressed maturity cycle. By late 2026, distressed deal flow may peak, creating a narrow but lucrative entry window for opportunistic capital.
Bisnow: "Once-In-A-Decade Opportunity: Cottonwood Group Closes $1B Fund", Bloomberg via Ground.News: Cottonwood Closes $1B Real Estate Fund, CoStar: Loan Extension Risks
