As the wave of debt from the era of low interest rates continues to mature, more distressed commercial real estate sales and foreclosures should be expected in 2026, said Jim Costello, executive director of the research firm MSCI.
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While infusions of private debt, especially mezzanine lending, so far have kept the full wave of losses at bay as CRE values have tumbled, the CRE industry should prepare for more pain, Costello said.
Right now, investors aren’t feeling the full force of the problem. But as some of these commercial properties inevitably go into default, the stacks of debt inside their loans will experience losses over the next year.
“Debt funds, they’re still delivering a positive return. There’s still enough cash flow from the surviving loans where the returns are still positive, but the capital component of those funds is slipping,” he said. “That mezz stuff is where there’s pain in the cycle.”
Some $300B in commercial loans were scheduled to mature in the second half of 2025, according to MSCI.
For the last several years, lenders delayed debt maturities on underwater properties into 2026. This strategy has now set the stage for more than $930B of maturing debt in 2026, according to S&P Global Market Intelligence, as reported by CRE Daily.
One of the reasons maturity has taken so long is that there has been new capital circulating in the markets.
Since 2020, nonbank debt funds have increasingly entered the CRE lending fray. In that time, more than 430 closed-end debt funds raised in excess of $137B for debt strategies, accounting for 16% of all CRE fundraising, according to JLL.
That infusion of private capital has met rising demand for mezzanine debt to keep commercial properties afloat as interest rates began to climb after the pandemic.
That demand isn’t expected to abate. A Rok Financial report says the compounded annual growth rate for mezzanine debt will increase more than 7% by 2034. The private credit market will grow to $2.6T by 2029, Rok Financial predicts.
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Costello said the flow of private capital into the lending market helped deals get extended, especially debt to bridge maturities past original expirations.
“Nobody could kick the can down the road in the aftermath of the [Global] Financial Crisis. This time they could,” he said. “As they've been doing it, they've been doing it using other structures that bring other types of capital in to fill portions of the capital stack.”
It is getting harder to pretend and extend any further, even with recent interest rate cuts. The cost of capital is rising, with average interest rates this year at 6.24%, up from the 4.76% rates on maturing debt, according to CRE Daily.
Patience may soon wear thin. With private debt inside capital stacks, there is more pressure for lenders to simply foreclose on the properties, especially central business district office buildings and multifamily properties, Costello said.
In the first half of 2025, lenders recorded nearly 150 CRE foreclosures, the highest midyear total since 2014, according to MSCI. Two-thirds of apartment foreclosures were on loans originated in 2021 and 2022, when borrowing costs were at historic lows, according to the report.
Costello said he expects the foreclosure rate to accelerate. MSCI anticipates a jump in the number of apartment foreclosures in the second half of 2026 as 60% of those vintage loans on apartments mature.
Unlike with the aftermath of the Global Financial Crisis, distress in this cycle has taken time to play out, Costello said.
“The last one, it was more of a rip-the-Band-Aid-off kind of approach. This one’s slower, pulling the Band-Aid off slowly,” he said.
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