Commercial real estate owners stuck with loans they took out when money was cheap are buying time with another short-term loan — paying up now for the flexibility to refinance later — and that is leaving them exposed as borrowing costs climb.

U.S. landlords struggling to secure permanent financing are rolling one floating-rate bridge loan into the next, moving properties within and across pools of securitized loans, Fitch Ratings said in August. 

They are betting that long-term rates will fall before their lenders’ patience runs out.

“That’s like paying anything to roll the dice one more time,” said Jim Costello, who co-leads MSCI’s real assets research team.

So far, the market is moving against them. The Federal Reserve raised rates in September for the first time since 2023, and the 10-year Treasury yield, which sets the price of permanent mortgages, hit 5.31% Monday, its highest level in more than 20 years.

Yet lenders still have plenty of money to hand out. 

They bundled $31.6B of bridge loans into bonds known as CRE collateralized loan obligations this year through August, more than in all of 2025 and on pace for the busiest year since 2021, according to Fitch.

As bridge-to-bridge loans move across CLO pools, what sits inside them is getting riskier. Stabilized loans are paying off and being replaced with loans that carry higher projected losses, Fitch found in a study of 65 actively managed deals it rated.

Still, on paper, the loans in Fitch-rated deals look fine. Just 0.52% were seriously behind on payments in July, down from 1.44% in March. But that is partly because lenders keep rewriting the terms, often by giving borrowers more time. Modified loans have soared 68.6% since the end of 2025 to nearly $4B.

The squeeze traces back to when debt was nearly free. 

In 2021, the 10-year averaged 1.45%, and the Fed held short-term rates near zero, so owners banked on being able to refinance cheaply later. The Fed’s 2022 hikes wrecked that plan, and lenders spent two years granting extensions rather than forcing sales. Fed cuts in 2024 and 2025 never pulled long-term rates down, and the 10-year is up more than a full point this year alone.

Even if the Fed reverses course and cuts later this year, that wouldn’t rescue these owners, Costello said. The Fed sets short-term rates, but long-term rates, the ones that drive mortgage costs, move with inflation and bond investors’ appetite. 

Apollo Chief Economist Torsten Slok wrote this week that bond rates may peak within a month, citing rising odds of a Middle East deal that would lower oil prices as the U.S. midterm election approaches. 

If rates do fall, Costello said, rolling the dice could pay off. If not, the reckoning arrives. 

“At some point, if rates don’t come down, I’m going to have a ‘come-to-Jesus moment’ with my lenders and other investors,” Costello said, taking the perspective of an owner on a second bridge loan.

Some lenders think that moment is near. 

Lenders who spoke at Bisnow’s National Commercial Real Estate Finance Event last week in New York warned that patience is running out. 

There hasn’t been much forced selling yet, Rialto Capital Head of Special Situations Joe Bachkosky said from the stage, but the longer rates stay elevated or keep rising, “the more likelihood that the day of reckoning comes.”

But lenders have kept refinancing their rivals’ 2021 loans for a simple reason: “Somebody’s getting a good spread on it,” Costello said.

Many debt funds are offshoots of private equity real estate firms, he said, and they view default differently than banks do. 

“I didn’t get into banking to become a property manager,” Costello said, playing the part of a bank loan officer.

But a debt fund lending against a reset value can plan for a default and may walk away with an ownership stake in a good building.

Those lenders are gaining share. Investor-driven lenders, including debt funds, grew to 16% of commercial property lending in the first half of 2026 from 13%, according to MSCI data reported by GlobeSt. Their average loan-to-value ratio was 69.5%, the highest of any lender group MSCI tracks.

Still, all that available debt is a big reason this downturn looks nothing like the last one. Distressed assets made up 20% of commercial property sales in late 2010, MSCI found. Through mid-2025, they were just 3%.

“There wasn’t debt available at any price,” Costello said of the 2008 financial crisis. “There still is today.”

The distress is different, too. Much of it is fundamental, concentrated in older office buildings that need a new use more than a new loan. 

“What are you going to do with a midblock prewar office building in Midtown [Manhattan]?” Costello asked.

No lender is in a hurry to inherit that problem, he said.

That is why Costello doubts the day of reckoning is as close as some lenders warn. It would take a shock such as a sharp jump in long-term rates or a credit crunch that cuts off the debt keeping these loans afloat.

“Unless somebody forces people to make hard decisions, they’re not going to want to for a while,” he said.