Looking ahead in 2026, the economic landscape regarding commercial real estate is arguably a mixed bag, with bright spots and blind spots, shifting demographics, evolving capital markets, and a fair bit of uncertainty.
The real issue? It’s the classic glass half-full versus half-empty dynamic. Yet, in this case, it’s often a single observer holding these two views at the same time! So, which is it? How can the market be perceived as “good” and “bad” at the same time? When applied to its illiquid nature, decision making for commercial real estate can become complex.
Distressed real estate complicates the matter further. Ever a constant in U.S. markets, distressed properties create both challenges and opportunities for investors, lenders, and operators of commercial real estate. Macroeconomic factors, along with capital flows, asset-specific fundamentals, and market sentiment, all play a role in determining distress levels for a given property type and/or market.
This article will take a bird’s-eye view of the current landscape, key drivers, and strategic considerations for stakeholders navigating distressed assets.
Economic Backdrop
The U.S. economy ended 2025 with moderate and improving inflation of just below 3%, against a Federal Reserve target of 2%, and with a Fed funds rate in the 3.75% to 4% range. The rate cuts of late 2025 have helped to provide some relief, but uncertainty remains regarding future monetary policy. As of early 2026, inflation was down to 2.4%, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI). Mortgage rates for commercial real estate continue to hover between 6% and 7.5%, while unemployment is stable at approximately 4.3%. Tariffs and supply chain disruptions continue to impact construction costs and timelines, with both negative and positive effects on property markets.
Debt is at the heart of determining if a property is distressed. On a larger scale, looking at upcoming loan maturities, aka the “wall of maturities” is a good place to start to help determine potential distress in the market. Nearly $400 billion in commercial real estate loans that had been set to mature in 2025 have been pushed into 2026, creating a backlog of refinancing that could potentially lead to distress. The key word here is potentially; while there is no guarantee that all of the upcoming loans will be refinanced or paid off, there is also nothing to say that they won’t. The wall of maturities is simply an indicator to watch. Prevailing interest rates and property pricing at the time of maturity will play an important role in how many of the upcoming loans will be refinanced, or if attractive financing will be available to potential buyers. When interest rates are considered to be too high, owners may not be able to refinance, and/or the pool of potential buyers will be lean; conversely, in a low-rate environment, many of these concerns are lessened.
Another key indicator is transaction volume. Transactions rebounded in 2025, with transaction volume up approximately 25% year over year (Q3 2024 to Q3 2025), and pricing up approximately 14% over the same time frame.1 More transactions are promising: deals must get done to help ease the logjam. But the pricing for many of these deals is also more expensive. Pricing is up approximately 14% from Q3 2024 to Q3 2025.2 Capitalization rates have been somewhat stable during this time, with rates for some property types staying flat, others decreasing slightly, and some increasing slightly. Looking back further, however, we see that capitalization rates are generally up across the board from three years ago, reflecting increased risk premiums and the impact of higher financing costs.3
What Constitutes a Distressed Property?
Distress is not limited to any one property type. Office properties, especially central business district (CBD) offices, have been particularly susceptible to the pressures of the current economic environment, but all asset classes can face distress under certain circumstances.
So, do we look to individual properties, or general markets, to determine distress levels? It’s certainly possible to have a distressed property in an otherwise liquid market, and also to have well-positioned properties that stay afloat in a distressed market. However, a distressed market is ultimately driven by the sum of individual properties that can arise from:
- Impaired cash flow: Properties unable to cover debt service due to declining occupancy, rent, or operational challenges.
- Imminent loan maturities: Assets facing refinancing risk, especially if current values are below outstanding loan balances.
- Ownership and capital structure issues: Complex ownership positions; leaseholds, ground leases, and sandwich positions; minority interests; and partnerships.
- External shocks: Regulatory changes, technological disruption, or demographic shifts that undermine asset fundamentals.
It’s these externalities, beyond the control of any given owner, that are important to understand when analyzing distress at the market level. While each asset class and market is unique, several macrotrends to watch in the near term will surely influence distress in the market, serving as warning signs for unlucky owners while also creating opportunities for investors.
Demographic Shifts
Changing demographics will continue to be a major disruptor to commercial real estate, opening new paths of revenue in some markets while shutting down others. Aging populations and changing migration patterns will continue to alter demand for housing, healthcare, and retail, while changing lifestyle habits and the need for affordable housing are driving interest in repurposing older assets and exploring new development models. Overlooked assets, or even entire swaths of a town, may by necessity become more or less desirable due to shifting demographic trends.
Local politics will also impact commercial real estate decisions for both users and owners, and property aspects taken for granted one day may suddenly be questioned or even changed the next. There is plenty of news about the wealth tax in California or the unique view on property rights, especially in the residential sector, coming out of New York; this uncertainty will continue to cause distress, and underperforming assets will continue to be at risk. Savvy investors, however, may be able to capitalize on these demographic trends and changes.
Dynamic Lending & Transaction Markets
Lower interest rates continue to be held out as a sort of holy grail to spur investment, but uncertainty persists, especially with the Fed keeping rates steady, as of early 2026. The jury is still out as to whether this is the right move, with some participants bemoaning the lack of additional cuts and others shrugging it off and moving forward.
Approximately $930 billion of commercial real estate loans will mature in 2026, up significantly from 2025, and at least $126 billion of this amount is considered to be distressed, as of late 2025.4 This presents quite a formidable wall of maturities for loans coming due in a 6% to 7% interest rate environment, as compared to the 3% to 4% rates at which many of these loans were originated. Many borrowers and lenders may continue to extend, but others will be faced with difficult decisions.
Private equity is sitting on significant “dry powder,” poised to capitalize on distressed opportunities. Sales of distressed commercial real estate properties exceeded $25 billion through Q3 2025, which was a 5% increase over the same period from 2024.5 Add to this the stress in the commercial mortgage-backed securities (CMB) world (Fitch recently assigned a “deteriorating” outlook to CMBS),6 and there may be plenty of opportunities, leading to many funds specifically targeting distressed assets and loans.
Investors seeking opportunities need to recognize nuances at both the market level and the property level and differentiate between decently cash flowing assets in a challenged geographic market versus those with ongoing tenancy issues. Consider a midtier CBD office asset: Does the asset have numerous long-term leases and a proven history of being able to attract tenants, or is there one major anchor tenant with an upcoming lease expiration? Similar type assets in the same market can have significantly different tenant profiles, each of which will require a different investment strategy.
AI & Technology Impacts on Real Estate
The big ongoing headline is how gross domestic product (GDP) is increasing while the labor market appears to be struggling. How can this be? A big part of the answer is technology. The ongoing implementation of artificial intelligence (AI), increased equipment and technology-related investments, automation, and legislation such as the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (CHIPS Act) and bonus depreciation have created a bit of a disconnect between economic output and labor’s impact to that output. Throw in an evolving market that continually demands of-the-moment property characteristics, and some properties run the risk of getting left behind.
The rise of AI, and the heightened focus on anything related to data centers, is already having an impact on certain markets and shifting the focus of investors. Locations that hadn’t been given much thought may suddenly be given a second look, and pricing for some properties in such markets is literally changing overnight. Some markets not previously considered as data center hubs are seeing year-over-year land increases between 20% and 40%, and land in established data center markets in Texas and Virginia is hitting record pricing.7 The race for newer and better data centers will create new opportunities in some markets, but may also shift the focus away from others. How this will all play out, and where the winners and losers will settle, remains to be seen.
Changes in Real Estate Property Characteristics
Changing use patterns in certain asset classes will also create opportunities, and possibly more distress. Office and hotel conversions, shopping mall repositioning, and evolving industrial requirements are creating pitfalls with certain asset classes while at the same time opening new avenues for value creation; the highest and best use of the site and the improvements will no longer be taken for granted. Office conversion to residential use has been discussed at length by the market over the last few years following changing office-use trends due to COVID-19 and changing work patterns. With office properties representing almost 40% of distressed assets, it’s no wonder that the square footage of conversions and demolitions was almost double the amount of new office supply in 2025 (23.3 million square feet converted or demolished versus 12.7 million square feet of new supply).8 Manhattan and Washington, D.C., see the lion’s share of conversions, but numerous markets across the country will see office conversions. Office conversion is not always an easy escape hatch from distress, however; not all office buildings are suitable for conversion, and for certain properties and/or markets, the costs can be prohibitive. With rising office rents and back-to-office policies of many employers, “to convert or not” is not always an easy question to answer. Nonetheless, conversion of distressed office assets is certainly something many investors will continue to consider in 2026.
Similarly, distressed properties in other asset classes, notably retail and hospitality, will certainly be under the microscope in 2026. Retail properties, such as shopping malls, may need to consider repositioning, adaptive reuse, or even “creative” demolition of underused or outright dead space, especially with vacated anchor space. New retail properties typically outperform assets of older vintage, and owners of and investors in distressed retail assets will need to think creatively to get out of a financial hole. Hotel owners, on the other hand, will need to laser-focus on operating margins to avoid sliding into one.
How Forvis Mazars Can Help
Distressed properties are both a challenge and an opportunity for the real estate industry. While economic headwinds and capital market disruptions can create pockets of stress, they can also open the door for creative solutions, strategic investments, and long-term value creation. For knowledgeable market participants, success will depend on detailed analysis coupled with a flexible strategy amid the uncertainty. Understanding the trends and how they are evolving will be paramount in navigating that uncertainty. At Forvis Mazars, we combine in-depth industry insight with tailored strategies to help you prepare for what’s next. If you have any questions or need assistance, please reach out to our Valuation team at Forvis Mazars.
- 1“US commercial real estate transaction analysis – Q3 2025,” altusgroup.com, December 5, 2025.
- 2Ibid.
- 3“Commercial Real Estate: 2026 Trends and Predictions,” reuters.com, March 2026.
- 4“The 2026 Maturity Wall: A Quantitative Framework for Identifying Distressed Acquisition Targets,” realcapanalytics.com, 2026.
- 5“Sales of distressed commercial property rise, led by offices,” costar.com, December 8, 2025.
- 6“U.S. Office Stabilization, Recovery Emerging Amid Pronounced Quality Bifurcation,” fitchratings.com, January 27, 2026.
- 7“Data Center Land Deals: Why Prices Are Skyrocketing in 2025’s Second Half,” datacenterrealestate.com, July 30, 2025.
- 8“Conversions & Demolitions Reducing U.S. Office Supply,” cbre.com, June 3, 2025.