The Coming Stress Test for Commercial Real Estate Borrowers

Commercial real estate borrowers are approaching a challenging refinancing period. Loans originated or refinanced during the ultra-low interest rate environment of 2020 and 2021 are now beginning to mature, and the capital markets that supported those loans five years ago have changed significantly.

An estimated $875 billion of commercial real estate (“CRE”) loans will mature in 2026, a level that remains elevated relative to long-term averages. For borrowers, lenders, and advisors involved in restructuring and litigation, the next several years may present a meaningful test of how commercial real estate loans perform when cheap debt disappears. 

The Five-Year Loan Problem

Many commercial real estate loans are structured with five-year maturities. During the pandemic period, these loans were frequently issued with historically low interest rates and optimistic underwriting assumptions.

At the time, low-cost capital served an important economic purpose. Government policy and financial institutions were focused on stabilizing the economy and preventing widespread business failures.

But the structure of those loans created a delayed challenge. 

Loans issued in 2020 are now reaching maturity. Borrowers seeking to refinance face two immediate realities:

• Interest rates are materially higher, and;
• Property values in some sectors are flat or lower

As a result, the same property may support less debt at a higher cost.

Refinancing in a Higher Rate Environment

Average financing costs have risen sharply since the low-rate environment of the early pandemic years. Borrowers who financed properties at interest rates in the 3–4 percent range may now face refinancing rates closer to 6–8 percent.

Even when the loan balance remains unchanged, the increase in borrowing costs can significantly raise debt service requirements.

At the same time, lenders often require:

• Lower loan-to-value ratios
• Higher debt service coverage
• Additional borrower equity

For borrowers who cannot contribute new capital, refinancing can become difficult even when the underlying property continues to generate stable income.

Lender Behavior Matters

While refinancing pressure is real, historical experience suggests that widespread collapse in commercial real estate is far from inevitable.

During the Great Recession, lenders often favored loan modifications, extensions, and other restructuring strategies over forcing borrowers into foreclosure, as liquidations frequently produced lower recoveries.

Banks frequently pursued alternative strategies, including:

• Allowing borrowers time to stabilize properties and grow into healthier financial positions
• Selling loans at discounts rather than forcing liquidation
• Holding troubled assets while stronger loans offset losses elsewhere in their portfolios

Loans may also change hands multiple times. Each purchaser may acquire the debt at a deeper discount, potentially allowing borrowers to continue operating the property while making adjusted payments consistent with reduced net operating income.

At the same time, the broader economy remains relatively strong. Real GDP has grown more than two percent annually in recent years, which has helped many borrowers maintain occupancy and operating income.

Offices: Structural Pressures Remain

Among major property sectors, offices continue to face the most visible challenges. The CMBS office delinquency rate has risen from 1.6 percent in mid-2022 to over 12.3 percent in early 2026.

Prospective tenants in most markets seek Class A space that offers modern amenities, updated systems, and attractive locations. This has left older Class B and Class C buildings particularly vulnerable. These properties often struggle to attract tenants or maintain rents while also requiring significant capital expenditures to remain competitive.

Office properties also face some of the highest operating costs in commercial real estate. Operating expenses for office assets often reach double-digit percentages of revenue, in some cases approaching 10–12 percent, which is generally higher than multifamily and many retail assets due to leasing costs, tenant improvements, and building service requirements. When those costs are combined with refinancing pressure, older buildings can quickly become difficult to finance.

For some borrowers, the decision to reinvest additional capital into aging office properties may be difficult to justify.

Retail Dynamics Are More Mixed

Retail properties face their own set of economic pressures. Service rates for retail properties are often two to three percentage points higher than those for multifamily, reflecting differences in tenant turnover, leasing risk, and operational complexity.

At the same time, retail performance varies significantly by market.

In suburban areas experiencing population growth and continued work-from-home patterns, neighborhood retail centers may benefit from increased daytime activity and local spending.

However, the broader consumer economy remains uneven. Many economists describe today’s environment as a K-shaped economy, where higher-income households continue to spend while lower-income consumers face tighter budgets.

That dynamic can affect retail tenants differently. Quick-service restaurants, for example, have faced pressure in lower-income markets as consumers become more value-conscious, in some cases shifting spending toward lower-cost food options.

Inflation could also play a role. If energy prices remain elevated, rising costs could reduce consumer purchasing power and place additional strain on retailers serving price-sensitive customers.

Multifamily Supply Pressures

Multifamily properties have generally performed well in recent years, but certain markets are experiencing temporary oversupply following heavy development activity.

In regions where a large number of new apartment units entered the market simultaneously, rent growth has slowed, with some markets experiencing flat or negative year-over-year changes.

Under those conditions, net operating income may not grow quickly enough to offset higher borrowing costs at refinancing.

Even strong properties can face pressure when financing assumptions made during the low-rate period no longer apply.

A Period of Adjustment

Commercial real estate has always been cyclical, and the current environment represents another adjustment period driven largely by changes in financing costs.

For borrowers and lenders, the key issue will be how existing loans transition into a higher-rate environment while property fundamentals vary across sectors and markets.

Some loans will refinance successfully. Others may require additional capital, loan modifications, or discounted note sales. In certain situations, more formal restructuring processes may become necessary.

For professionals working in restructuring, fiduciary roles, and litigation consulting, the commercial real estate market may continue to produce complex situations where financing structures, property economics, and lender strategies intersect.

Understanding how those pressures develop will be critical as the next wave of pandemic-era loans reaches maturity.