High Interest Rates and the Commercial Real Estate Debt Crunch

SEO Excerpt: High interest rates since 2022 have triggered a Commercial Real Estate Debt Crunch in the U.S., forcing property investors and developers to confront a massive wave of debt refinancing. Nearly $1.8 trillion in commercial real estate loans are coming due by 2026 amid sharply higher borrowing costs, squeezing debt service coverage and pressuring asset values.

Executive Summary

Rising interest rates are posing a serious refinancing challenge for U.S. commercial real estate (CRE). After a decade of cheap debt, the Federal Reserve’s rapid rate hikes since early 2022 have sent borrowing costs to their highest levels in years. Owners of offices, retail centers, apartments, and other CRE assets must now refinance old loans at much higher rates, creating a “debt crunch” across the sector. An estimated $1.8 trillion in CRE loans will mature by the end of 2026, confronting borrowers with debt service payments that in some cases could jump 75–100% over previous levels. This surge in costs is eroding property cash flows and debt service coverage ratios, making it far more difficult to repay or refinance loans taken out during the low-rate era.

At the same time, transaction volumes in commercial real estate have plummeted – recent sales activity is roughly half of what it was before the COVID-19 pandemic. Higher financing costs and economic uncertainty have cooled investor appetite, contributing to falling CRE property prices (in stark contrast to the boom in home values during the pandemic). In many cases, property valuations have declined from their peak, even dipping below outstanding loan balances for some assets. Lenders and borrowers are responding by negotiating extensions, loan modifications, and other workouts to avert defaults. The following analysis delves into the scope of this refinancing wall and its financial implications, then explores how the new interest-rate environment is reshaping lending, urban development, and investment strategy.

Financial Analysis: The Debt Refinancing Burden

Mounting Maturities: U.S. commercial real estate faces an unprecedented refinancing wall over the next few years. By some estimates, about $1.8 trillion of CRE debt is set to mature by 2026 – a volume of loan maturities far above normal levels. In 2026 alone, maturities could approach $1.0–1.3 trillion, roughly double the typical annual amount. This wave includes loans originated in the mid-2010s that are coming due all at once. Crucially, many of these loans were made or refinanced at the tail end of an ultra-low rate period (often with interest rates in the 3–4% range). Borrowers who locked in such cheap financing are now facing refinance rates that are nearly double (or more) what they previously paid. In other words, a loan that carried a 3.5% interest rate may now reset at 7%+. As a result, debt service costs have skyrocketed, with monthly payment obligations increasing on the order of 75%–100% for many loans maturing in the current environment. Properties that comfortably met their debt service coverage at 3% interest could struggle to cover payments at 6–7% rates.

Rising Debt Service Ratios: The jump in interest costs is straining debt service coverage ratios (DSCRs) and borrower finances across CRE portfolios. For example, an office owner who was paying $500,000 in annual interest on a loan may now owe $900,000 or more for the same principal balance – without a commensurate increase in net operating income. Many borrowers are scrambling to inject new equity or find secondary financing to reduce loan balances and keep DSCRs at acceptable levels. Industry analysts warn that borrowers with near-term maturities face serious challenges, as the ability to repay or refinance under these conditions is “much more difficult”. Loan underwriters are also demanding more conservatism: whereas five years ago a lender might have offered a 70–75% loan-to-value (LTV) refinance, today that new loan might cover only ~55–60% of the property’s value due to stricter debt yield and DSCR requirements. In short, new loans cover a smaller share of asset value, forcing owners to bring cash to the table or secure gap financing to complete a refinance. Many borrowers lacking additional equity are resorting to mezzanine loans or preferred equity layers, often from private debt funds, to bridge the shortfall between the senior loan proceeds and the amount needed to pay off the maturing debt.

Impact on Transactions and Values: The difficult refinancing backdrop has contributed to a broader slowdown in CRE deal activity. Commercial real estate sales volume in recent years has been running at roughly 50% of pre-2020 levels, as higher interest rates and tighter credit have thinned the pool of buyers and made deal financing more expensive. Fewer willing buyers and lenders mean lower property valuations in many segments. Commercial property prices have been falling from their peak, a notable reversal after years of appreciation. For instance, office buildings in some markets have seen significant value erosion. In New York City, average office property values per square foot dropped from over $1,000 in 2019 to around $567 in 2025, reflecting higher cap rates and pessimism about future cash flows. Appraisals are coming in lower nationwide as capitalization rates expand to accommodate the higher cost of capital. Some property types (e.g. multifamily and industrial) have only seen modest cap rate increases, while others (especially older offices, shopping malls, and hotels in weaker markets) have experienced steep valuation declines of 20–30% or more from 2021 peaks.

Loan Performance and Distress: So far, the feared tsunami of defaults has been muted, but loan performance metrics are deteriorating at the margins. The share of commercial mortgages transferring to special servicing or delinquency has ticked up, especially for offices. According to industry data, the volume of distressed CRE assets (loans in default, foreclosure, or lender REO) reached about $126.6 billion in Q3 2025, an 18% year-over-year increase. Office properties make up a significant portion of these troubled loans, but even the multifamily sector – which has strong demand fundamentals – accounted for roughly $22.8 billion of distressed debt (about 18% of the total) as of late 2025. Rising default metrics indicate that some owners simply cannot refinance or restructure under current conditions. However, rather than foreclosing en masse, many lenders are choosing to “extend and pretend,” granting loan extensions, short-term modifications, or temporary interest-only periods to buy time. For example, banks (especially regional and community banks with CRE exposure) are often extending maturities by 1–2 years in hopes that market conditions improve (i.e. interest rates fall or values recover) before the ultimate refinancing is due. These workouts have helped avoid a wave of foreclosures in 2023–2025, but they also kick the can into 2026–2027, concentrating a larger “wall” of maturities in those years. The bottom line is that the CRE sector is grappling with a substantial debt refinancing burden that is straining financial metrics. Owners who can refinance are often swallowing painful terms (higher rates, lower leverage), and those who cannot are seeking creative solutions to hold on until relief arrives.

Table: U.S. Commercial Real Estate – Selected Office Vacancy Rates by City

City (2024–25)	Office Vacancy Rate (%)
New York (Manhattan)	~22% (Q3 2025, ~double pre-pandemic levels)
Los Angeles	~25% (Q4 2024, record high)
Chicago (Downtown)	~25.7% (Q4 2024, record high)
Miami	~15.5% (Apr 2025, lowest among top 25 markets)
San Francisco	~29% (Apr 2025, among highest in nation)

Above: Office vacancies remain elevated in many major markets, with Sunbelt cities like Miami significantly outperforming coastal gateway cities like New York, Los Angeles, Chicago, and San Francisco in 2024–2025.

Refinancing Environment: From Low Rates to High Rates

The refinancing crunch is fundamentally driven by the dramatic shift in interest rates and credit conditions since the pandemic. In the late 2010s and through 2021, commercial borrowers enjoyed historically low interest rates – often sub-4% on long-term mortgages. That environment vanished quickly after 2022. The Federal Reserve’s fight against inflation pushed benchmark rates up at the fastest pace in decades, and by 2023 the federal funds rate was above 5%. Commercial mortgage rates followed suit: loans that could be had at 3–4% interest a few years ago now carry rates of 6–8% or higher, depending on asset and borrower risk. This run-up in rates has nearly doubled the cost of debt for CRE owners, fundamentally altering project economics. For context, an apartment complex that in 2021 could be financed with a 10-year loan at 3.5% might face a refinance at 7% today – adding tens of thousands of dollars in interest expense each month.

Loan-to-Value Compression: In addition to higher rates, borrowers are encountering more conservative lending standards. Lenders have reacted to the new environment by lowering acceptable leverage ratios and increasing debt service coverage requirements. As noted, a new loan today covers a smaller portion of a property’s value than it did when credit was looser. Many banks and CMBS lenders that previously offered 70–75% LTV loans are now closer to 55–65% LTV on the same asset, given higher debt costs and economic uncertainty. This means borrowers must pony up more equity to refinance – either by injecting cash, bringing in new partners, or subordinated debt. For example, if an investor owes $50 million on a maturing loan but the property is now valued around $60 million (and new lenders will only lend 60% LTV = $36 million), that owner might need to contribute $14 million in fresh equity or find a mezzanine lender to fill the gap. Indeed, private credit funds have stepped in to provide mezzanine loans or preferred equity for such situations. These alternative debt providers charge high yields, but for some sponsors they are the only option as traditional banks retrench.

Securing Extensions and Modifications: Borrowers unable to fully refinance at payoff are often negotiating extensions or modifications with their current lenders to buy time. During 2024–25, a prevalent tactic was so-called “extend and pretend,” where lenders extend loan maturities (or temporarily allow interest-only payments) rather than forcing a default. This has been especially common with loans on office buildings that are facing vacancy challenges – banks prefer to give a viable borrower another 1–2 years to stabilize occupancy or await lower rates. Such extensions come at a price; lenders may charge extension fees, demand partial paydowns, or increase spreads. Nonetheless, many owners have been willing to accept those terms to avert foreclosure. Not all borrowers receive extensions, however. Lenders are triaging based on asset quality and sponsorship – Class A properties with strong sponsors are more likely to get leniency, whereas a marginal property with a highly leveraged owner may not. Thus, some distressed assets are beginning to hit the market as owners run out of options (we discuss this more in the Investor Strategy section).

Tighter Credit Conditions: The broader credit environment in CRE has tightened markedly post-2022. Regional banks – which account for a large share of commercial real estate lending in the U.S. – have become more cautious due to economic uncertainty and regulatory pressure. The well-publicized regional bank failures in 2023 further spooked lenders and regulators about CRE exposure. As a result, many banks have pulled back on new CRE loans, especially for riskier property types like office and for construction projects. Life insurance companies and CMBS (commercial mortgage-backed securities) lenders have also been selective, focusing on lower-leverage, high-quality deals. The net effect is a credit crunch for refinancing: even borrowers willing to pay higher rates sometimes struggle to find a lender willing to refinance the full amount of their old loan. This credit gap has opened opportunities for private capital – debt funds, mortgage REITs, and other non-bank lenders – which are raising funds to lend at higher yields. According to industry reports, private credit strategies have drawn significant investor interest, accounting for about one-third of new real estate capital raised recently. These private lenders are stepping in to make loans that banks won’t, albeit at interest rates that can reach double digits for transitional or high-risk assets.

In summary, the refinancing climate has shifted from the easy money era of the 2010s to a higher-cost, risk-sensitive era post-2022. Owners must now navigate: (a) Much higher interest rates, (b) Lower leverage and stricter terms, (c) The need for additional equity or secondary financing, and (d) Selective, tighter credit from traditional lenders. Those who can adjust to these new realities – or wait them out – will fare best, while others will be forced to restructure or relinquish assets if they cannot align with the post-pandemic lending environment.

Architectural and Urban Development Impacts

The debt crunch and high-rate environment aren’t just financial issues – they are also reshaping the physical landscapeof commercial real estate. As owners grapple with underperforming properties and expensive debt, many are changing how they use and develop real estate. Key trends include:

• Repurposing Obsolete Offices (Class B/C Conversions): One prominent outcome is a push to repurpose or redevelop underutilized office buildings, particularly aging Class B and C office inventory that struggles to attract tenants. With office vacancy rates at historic highs in many downtowns, landlords of older buildings face a choice: invest heavily to upgrade to modern standards, or convert the building to a new use. Increasingly, conversions to residential apartments, hotels, or other uses are seen as a win-win, helping reduce the glut of office space while addressing housing or hospitality demand. In cities like New York, for example, office-to-residential conversion projects have surged – NYC saw 3.3 million sq. ft. of offices converted in 2024, more than double the prior year. Nationwide, office conversions and even demolitions are removing obsolete supply faster than new office construction is adding space, which should gradually help rebalance the office market. Repurposing is complex (zoning, structural, and financial hurdles abound), but local governments are encouraging it through incentives. Cities such as New York have enacted tax abatements (e.g. the 2024 “467-m” program offering up to 35 years of property tax relief for office-to-housing projects) and streamlined zoning approvals to spur conversions. For owners pursuing such projects, bringing in architects and planners early is critical. Engaging professional site planning services can ensure the new design is both feasible and optimized. For example, InnoWave Studio offers specialized site plan expertise to help reimagine properties – crafting detailed plans that address zoning, layout, and community needs for adaptive reuse projects. By repurposing Class B/C buildings into apartments, laboratories, hotels, or mixed-use facilities, developers can breathe new life into “stranded” assets and potentially unlock new revenue streams that justify the reinvestment.

• “Flight to Quality” and Demand for Class A Spaces: Another clear trend is a bifurcation of the office market – often termed a “flight to quality.” Even as overall office demand is down, top-tier Class A offices are seeing relatively stronger demand, while lower-quality buildings languish. Companies are using office upgrades as a lure to bring employees back on-site, favoring modern buildings with excellent amenities, ventilation, and sustainability credentials. As a result, Class A office assets are stabilizing in occupancy and rents, whereas many Class B/C offices face an uncertain future. For instance, in some cities we see Class A vacancy rates actually declining or holding steady, even as overall vacancy rises – meaning the weaker stock is absorbing most of the empty space. In downtown Chicago, Class A vacancies ended 2024 around 21%, far below Class B’s 33% vacancy, reflecting tenants’ clear preference for newer, high-quality towers. Landlords of Class B/C buildings are thus under pressure to upgrade (retrofit to Class A standards) or repurpose as noted above. This flight-to-quality extends beyond offices: prime “Class A” retail centers (e.g. top-tier malls) and industrial facilities (modern logistics warehouses) continue to attract tenants, while outdated shopping centers or old warehouses struggle. The emphasis on quality is also affecting new development – virtually all new office construction is focused on high-end, amenity-rich buildings that can truly compete with work-from-home alternatives. Older assets that cannot be economically upgraded may become functionally obsolete. In this high-interest environment, investors are channeling capital disproportionately into well-leased, high-quality assets where the risk is lower, rather than gambling on distressed Class B/C properties without a clear repositioning plan.

• Growth of Mixed-Use and Flexible Spaces: The challenges in single-purpose commercial properties (especially offices and retail) are accelerating a pre-existing trend toward mixed-use development and more flexible commercial footprints. Developers and urban planners are increasingly designing projects that blend office, residential, retail, and hospitality uses in one site or building. Mixed-use complexes create synergies – for example, residents provide a built-in customer base for ground-floor retail, while daytime office workers activate restaurants and shops. They also spread risk: if office leasing is slow, perhaps the apartments or hotel component pick up slack. New projects are rarely just one thing; even corporate office towers are adding coworking floors, fitness centers, event spaces, or hotel rooms to increase utilization. In the Sunbelt, many suburban office parks are being redeveloped into “live-work-play” districts with apartments, green space, and entertainment options alongside offices. Flexible workspace design is also on the rise inside buildings – floorplates that can adapt from office to lab to residential use, movable walls, and robust digital infrastructure to accommodate hybrid work. For example, one high-profile development in Miami, “Mercedes-Benz Places,” is a 295,000 sq. ft. mixed-use project combining luxury residences and office space in the same building. This kind of cross-use concept is becoming more common as investors seek resiliency. Even existing assets are being reconfigured: think of underused parking garages turned into last-mile delivery hubs, or half-vacant shopping malls adding medical clinics and apartments. In essence, the physical form of commercial real estate is evolving to be more adaptable and multi-purpose, which landlords hope will make properties more resistant to downturns in any single sector.

• Urban Planning Shifts & Adaptive Reuse: The stresses on commercial real estate are prompting wider urban planning shifts as cities rethink zoning and land use for a post-pandemic economy. High-vacancy downtowns, especially those heavy in older office stock, are focusing on adaptive reuse strategies to prevent blight. Local governments and urban planners are collaborating with developers to encourage the transformation of redundant commercial buildings into something useful. We already noted the policy steps in New York City to fuel office-to-housing conversions; similarly, Washington D.C., Chicago, San Francisco, and others are evaluating incentive packages (tax credits, expedited permitting, low-interest financing) to nudge the market toward adaptive reuse. Some cities are relaxing zoning codes to make it easier to change an office building to residential or other uses (e.g. removing minimum unit size requirements or parking minimums that hinder office conversions). There is also increased attention to downtown revitalization – for instance, converting empty office floors into arts spaces, community colleges, or urban farms, in addition to traditional mixed-use. Urban planners see the current crisis as an opportunity to “right-size” city centers: reducing excess office capacity and introducing more housing and diverse activities to make downtowns 24/7 neighborhoods rather than 9-to-5 job centers. In the long run, these adaptive reuse trends can lead to more sustainable and resilient cities. As Cushman & Wakefield noted, conversions are acting as a “pressure valve” to remove obsolete supply and reposition challenged assets while also addressing housing shortages. The built environment of 2030 may look different – perhaps fewer purely commercial skyscrapers and more blended-use towers and reimagined communal spaces. For architects and developers, the mandate is to creatively reuse what exists and ensure new projects are flexible by design. Firms specializing in innovative site planning and visualization (like InnoWave Studio) are in high demand to help envision these transformations from single-use properties into multi-dimensional community assets.

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Geographic and Market-Level Outlook

Real estate is always local, and the impacts of the debt crunch and high-rate environment are playing out differently across regions and property types. Here we examine how various major markets and asset classes are faring, highlighting notable geographic trends:

Major City Office Vacancies: Office markets in big U.S. cities have been under intense pressure, though some are worse off than others. Broadly, central business district (CBD) office vacancies are at or near record highs in many markets. For example, New York City’s office availability (Manhattan) hit about 18–19% in 2024, roughly double its pre-pandemic rate (~9% average). By mid-2025, Manhattan’s office vacancy was still elevated (~22%, including sublease space) despite a slight improvement from its peak. Chicago and Los Angeles are in a similar boat – downtown Chicago ended 2024 with a 25.7% vacancy rate, and Los Angeles around 25% vacancy as well, each the highest in decades. These older, traditionally dense office markets have been hit by remote work and tenant downsizing, leaving large swaths of space empty. In contrast, some Sunbelt cities and secondary markets are weathering the storm better. Miami, for instance, boasted the lowest office vacancy (15.5%) among 25 major markets as of April 2025, reflecting strong business migration and limited new supply. Other Sunbelt metros like Austin or Dallas also saw vacancies rise during the pandemic, but sustained in-migration and economic growth have kept demand relatively robust. (Even so, Austin and Dallas had office vacancies of ~24–29% in 2025, showing that no market is completely immune.) Coastal tech-centric markets like San Francisco have some of the highest vacancy levels – pushing 30% by 2024 – due to major shifts toward remote work in tech and a wave of new office buildings that delivered just as demand shrank. Summary: Gateway markets (NYC, Chicago, SF, LA) generally have higher office vacancy and more severe loan stress, whereas Sunbelt markets (Miami, Charlotte, Nashville, etc.) tend to have lower vacancy and firmer rent growth, although the gap is narrowing slightly as companies re-evaluate needs everywhere.

Sunbelt vs. Traditional Core Markets: The divergence between the Sunbelt and the traditional “gateway” cities has been a defining theme in recent years, and the current environment reinforces it. Sunbelt markets – such as those in the Southeast and Southwest (e.g. Florida, Texas, Arizona, Carolinas) – continue to benefit from population and job growth, which supports real estate demand even amid higher interest rates. Many companies and residents have relocated to these lower-cost markets, boosting absorption of apartments, industrial space, and even offices. In the Sunbelt office sector, some markets have already surpassed pre-pandemic leasing activity, and large investors are actively acquiring assets there, believing in their long-term growth. For example, Dallas and Raleigh saw major office acquisitions in 2025 by institutional investors betting on the Sunbelt’s resilience. Furthermore, rent trends illustrate the contrast: as of 2025, Miami’s office rents were up ~15% year-over-year, the highest increase among major markets, while rents in places like Manhattan, San Francisco, and Washington D.C. were flat or declining. This indicates that demand in Sunbelt cities has remained strong enough to support rising rents, whereas high-vacancy northern cities are seeing landlords cut rents to attract tenants. Traditional core markets (New York, Chicago, Boston, San Francisco, L.A.) face more structural headwinds from telework adoption, higher taxes, and outmigration. That said, some gateway cities are starting to stabilize – e.g. Manhattan saw vacancy decline from 23.8% to 22.3% in mid-2025 as leasing picked up slightly. And not all Sunbelt markets are booming uniformly; a few high-growth markets (like Austin, which has 28.9% vacancy) built too much office space, leading to a local glut. Overall, investors are recalibrating geographic strategies, often favoring Sunbelt and “smile” regions for growth-oriented plays, while approaching coastal gateway markets more cautiously or focusing only on prime assets there.

Performance by Asset Type: The current cycle is impacting each property sector differently, creating clear winners and losers:

• Office: The office sector remains the most stressed major asset class. Higher vacancies and falling rents (particularly in older buildings and dense urban cores) are undermining office cash flows and values. As discussed, many office owners are dealing with loans under water and must decide whether to refinance with significant capital injection, sell at a steep discount, or hand keys to the lender. There is a stark divide within the office sector – premier Class A offices in prime locations are holding value relatively well (and still attracting financing, albeit at higher rates), whereas commodity Class B/C offices in secondary locations face a potential “permanent decline”in demand. New leasing is dominated by top-tier spaces as tenants “flight to quality,” leaving a large portion of older office stock potentially obsolete. Investors are generally avoiding office acquisitions unless deeply discounted or part of a conversion play. It’s worth noting, however, that some data suggests office usage has bottomed out and is slowly rising as more firms enforce return-to-office; if this trend continues, the office market could begin a long, gradual recovery off the lows.

• Multifamily: Apartment buildings (multifamily) have been a relative stalwart through the turmoil. Fundamentals are strong in many regions – vacancy rates nationally are moderate (~6% on average) and demand for rental units remains robust, bolstered by high single-family housing costs. Multifamily is not immune to the refinancing wall, however; a huge volume of multifamily mortgages (often short-term or bridge loans used in value-add deals) is coming due in 2025–2026. Some highly leveraged apartment owners, especially those who bought at peak prices in 2021–22 with floating-rate debt, are now experiencing cash flow strain as interest costs have climbed and rent growth has cooled. This has led to pockets of distress in multifamily – e.g. several Sunbelt multifamily portfolios entered default in 2023–24 when rate caps expired and loan payments spiked. Still, in terms of property operations, multifamily is healthier than office or retail. Even with record new supply hitting the market in 2023–24, absorption has kept pace in many cities. Rents have flattened in some overbuilt markets, but there is no crash in multifamily pricing – investors remain confident in the long-term need for housing. Cap rates for apartments have risen perhaps 100–150 basis points off lows, but low-rise suburban and “workforce” housing assets are especially sought after as defensive plays. By asset class performance, multifamily is expected to continue to outperform most other sectors in a high-rate regime, due to its shorter lease terms (allowing rents to reset with inflation) and essential need.

• Industrial: The industrial and logistics sector has been the standout performer of the past decade, and it continues to be relatively strong, though there are signs of normalization. During the pandemic e-commerce boom, industrial vacancy in many markets fell under 3% and rents surged, yielding record-high values. As of 2024–25, industrial demand remains solid but has tapered from the frenzied pace – net absorption is positive but lower than a year ago, and rent growth has moderated. A few markets that saw a building spree (some inland distribution hubs) have experienced slight upticks in vacancy as new supply outstrips current demand. Nonetheless, the structural driversfor industrial real estate (e-commerce penetration, supply chain reconfiguration, onshoring of manufacturing, safety stock inventory trends) are firmly intact. Many tenants are still taking space, just more cautiously. National industrial vacancy is creeping up but is still only in the mid-single digits (%), far below office or retail. High interest rates have made it costlier for developers to build spec warehouses, which is naturally throttling back future supply and supporting rents. Investors view industrial as a preferred asset class even in a high-rate environment – it’s seen as resilient and supported by mega-trends. Cap rates have risen off historic lows (which were ~4% for prime logistics); now industrial cap rates might be 5–6% depending on the market, reflecting higher debt costs. But demand from institutional buyers (pension funds, REITs) for quality industrial assets is strong, and many are eagerly awaiting any distress or repricing to deploy capital. In sum, industrial properties remain a favored sector, with only modest impacts from the debt crunch compared to more challenged sectors.

• Retail: The retail sector’s story is twofold. On one hand, e-commerce and shifting consumer habits have been long-term headwinds for certain retail formats (particularly malls and big-box centers). On the other hand, the post-pandemic period has seen something of a revival for brick-and-mortar retail in certain segments, and importantly, there has been very little new retail development in the past few years. This limited supply has kept retail occupancies relatively high in the best locations. In fact, retail space is exceptionally tight, with national retail vacancy around 5% or less for quality centers. Strong categories include grocery-anchored shopping centers, which have maintained near-full occupancy and rent growth as they cater to everyday needs. Experiential retail (restaurants, entertainment venues, gyms) is also seeing a comeback as consumers seek experiences outside the home. Higher interest rates have impacted retail in that leveraged buyers (like certain mall owners) have defaulted on some underperforming malls rather than refinance. But broadly, retail property values have not fallen as sharply as office – in part because they already underwent a correction in the late 2010s. The current market has even created opportunities for retail: some empty big-box stores are being backfilled by logistics uses or non-retail tenants (e.g. call centers, medical clinics), demonstrating adaptability. Overall, retail is holding steady: foot traffic and sales at physical stores have recovered, and retailers have adjusted store formats to omnichannel models. Investors are selective – the best grocery-anchored centers and lifestyle centers are in demand, whereas class C malls or strip centers in weak areas might have few takers. The high-rate environment favors retail assets with strong in-place cash flows (since growth is modest), and many such assets can still refinance because their loan sizes are smaller and lenders view them as stable. According to NAR, retail space availability has remained below 5% for the past couple of years amid steady demand – a far cry from the distress in offices. Thus, from a market-level view, retail (especially necessity retail) is one of the more stable asset classes right now.

• Mixed-Use and Other Niches: “Mixed-use” isn’t a single asset class, but it’s worth noting that properties combining multiple uses are becoming more common and can be more resilient. For instance, a building with offices over a hotel and ground-floor retail has diversified income streams. In many downtowns, older office towers are being converted to mixed-use (office + residential or hotel) to improve viability. These hybrid assets can blur the line in performance metrics but often achieve higher overall occupancy by catering to multiple demand segments. Hospitality (hotels), meanwhile, experienced a strong rebound in leisure travel in 2021–2022 and, despite economic worries, many markets are still seeing healthy hotel occupancy and room rates. Limited new hotel construction during COVID means some cities have a tight hotel supply, which has been good for existing owners. High interest rates have mostly impacted hospitality by making refinancing costly and delaying new hotel projects, but operationally the sector is recovering (business travel remains a soft spot, however). Specialized sectors like data centers, life science labs, and medical office are also notable. Data centers are in a boom, with near 0% vacancy in major hubs due to insatiable demand for cloud infrastructure, although power constraints in some regions are a limiting factor. Life science real estate had a golden run during the biotech surge, and while it has cooled a bit with VC funding down, labs in core biotech clusters still command premium rents. Medical office and healthcare facilities are very steady performers (people continue to need medical services regardless of the economy), and these assets often have long-term leases with credit tenants, making them attractive in a high-rate environment for their bond-like stability. Finally, self-storage, student housing, and manufactured housing are other niche segments that have shown resilience and are gaining investor interest as defensive plays in times of uncertainty.

In summary, the market outlook varies widely by both location and property type. Office is the most challenged, especially in coastal urban markets, whereas Sunbelt real estate and sectors like industrial, multifamily, and necessity retail are more resilient. High interest rates are acting as a stress test, revealing which markets and assets have durable demand. Investors and lenders are recalibrating their strategies accordingly – a theme we explore next.

Investor Strategy Insights

For commercial real estate investors and developers, the current high-rate, debt-constrained environment demands a strategic shift. Gone are the days of easy refinancing and cap-rate compression-driven gains. Instead, stakeholders must emphasize active asset management, prudent financing, and careful deal selection to achieve solid risk-adjusted returns. Below are key strategy insights and actionable guidance for navigating the commercial real estate debt crunch:

1. Proactive Debt Restructuring & Refinancing: Investors should take initiative in managing upcoming loan maturities, rather than hoping conditions improve overnight. This means engaging lenders early to negotiate refinancing or loan modifications on maturities due in the next 1–3 years. Extend loan terms where possible – many banks are open to 12- to 24-month extensions or interest-only periods for borrowers who have a credible plan. It’s wise to lock in interest rates or secure caps if using floating-rate debt, even if those hedges are expensive, to prevent further payment shocks. For assets with significant equity, consider paying down loan balances to a level that qualifies for refinancing at today’s lower LTVs – bringing fresh equity can be painful, but it may preserve the asset and avoid fire-sale pricing. Where the current lender is unwilling to extend or refinance, be prepared to shop for alternative financing. Life insurers, debt funds, and other private lenders are actively looking to deploy capital into real estate debt at today’s higher yields. These sources might refinance a maturing loan when traditional banks cannot – albeit often at higher interest rates or with profit participation. Investors might also explore mezzanine debt or preferred equity to fill financing gaps. While layering on mezz debt increases the cost of capital, it can bridge a shortfall and buy time until an asset’s cash flow improves or rates ease. In more severe cases, debt restructuring via recapitalization may be needed: for example, bringing in a new equity partner to pay down debt, or negotiating a loan-to-own deal where the lender takes an equity stake (reducing the debt load). Bottom line: have a clear business plan for each loan maturity – whether refinance, extend, or sell – and communicate proactively with lenders. Demonstrating transparency and a willingness to contribute capital can lead to more favorable outcomes in loan workouts. By contrast, a passive approach risks running out the clock and losing control of the asset.

2. Favor Resilient Assets and Markets: In a high interest rate regime, asset selection is critical. Investors should tilt portfolios toward property types and geographic markets that can better withstand economic and financing stress. Preferred asset profiles include those with strong, stable cash flows and solid demand drivers. For instance, multifamily and industrial properties are broadly viewed as safer bets at this stage of the cycle – apartments because housing is always needed (and rent growth can somewhat keep up with inflation), and industrial because of enduring e-commerce and logistics demand. Essential retail (such as grocery-anchored centers) and healthcare-related real estate (medical office buildings, hospitals) also tend to be defensive plays that perform relatively well even when capital is expensive. Conversely, be cautious with assets facing secular headwinds or heavy capex needs – e.g. older offices in tertiary markets, struggling regional malls, or luxury hotels reliant on business travel. If you do pursue higher-risk turnarounds (say, repurposing a vacant office building), underwrite with very conservative assumptions and ensure a significant risk premium (i.e. potential high return) to justify the gamble. Geographically, look to markets with growth tailwinds: many investors are overweighting the Sunbelt and Mountain West, where population and job growth can bolster occupancy and rent trends. That said, opportunities can also emerge in oversold gateway cities – for example, one might cherry-pick a well-located Manhattan office tower at a steep discount, banking on a long-term rebound. The key is selectivity: target high-quality assets or locations that will remain in demand even if economic growth slows. As one industry outlook noted, leaders should be prepared to “rebalance holdings to property sectors or locations insulated from near-term headwinds – capturing upside in growing segments while cushioning for downturns.” This might mean reallocating capital from, say, a coastal office REIT into a Sunbelt multifamily portfolio, or from speculative development projects into core income-producing assets. Also, within each property type, consider the class and niche – e.g., focus on Class A logistics facilities with long-term leases to credit tenants, or necessity-driven neighborhood shopping centers, as these likely offer more stability in an environment of tight money.

3. Reassess Risk-Adjusted Return Expectations: With the cost of capital higher, investors must reset their return benchmarks and strategies. The easy money of ultra-low rates (which often enabled double-digit annual returns via cap rate compression) is gone. Now, achieving attractive returns requires either (a) buying at lower prices or (b) adding real value to assets – or both. This is essentially a return to real estate fundamentals. Investors should demand higher going-in cap rates to compensate for higher financing costs and risk. For example, if you required a 5% cap rate in 2019 when borrowing at 3%, you might require a 7%+ cap rate today if borrowing at 6%. This adjustment is happening across the market: prices are coming down to bring cap rates and debt yields in line with lenders’ requirements and investor return targets. Be disciplined in underwriting – use realistic cash flow growth assumptions, higher exit cap rates, and account for shorter lease terms or re-leasing downtime where applicable. It’s prudent to stress-test deals at even higher interest rates or lower occupancy to see if they remain breakeven; if a deal only works under rosy projections, it likely isn’t worth doing in this climate. Risk-adjusted return thinking also means prioritizing deals where you are getting paid for the risk. For instance, there may be distress opportunities to acquire quality assets at 20–30% discounts from peak values. Acquiring a well-located apartment building at a discounted price can set up excellent long-term returns once the market stabilizes – essentially buying low in a down cycle. Some opportunistic investors are indeed moving in this direction: notable firms have raised funds to scoop up assets or loans from distressed sellers at a bargain. If you have access to capital, this may be the time to negotiate favorable deals – whether it’s purchasing the note on a troubled property for cents on the dollar, or providing rescue capital in exchange for equity upside. However, remain mindful of liquidity and hold period – higher rates mean it may take longer for assets to appreciate, so plan for longer hold times and ensure sufficient reserves. Adjust your hurdle rates upward: many investors are now targeting IRRs in the mid-teens or higher for value-add deals (versus high single-digits a few years ago) to justify the increased risk and illiquidity in today’s market. In summary, sharpen your pencil and don’t hesitate to walk away from deals that don’t meet stricter return criteria. The market is repricing, and patience can be a virtue; as valuations bottom out, the goal is to strike when risk and reward are appropriately balanced.

4. Strategic Capital Deployment & Partnerships: In this environment, capital is king. Investors with dry powder (available cash or committed funds) are in a position to capitalize on distress and dislocation – but strategy and timing are crucial. One approach is to allocate capital toward real estate debt investments instead of equity, effectively becoming the lender rather than the owner. With many traditional lenders retreating, private investors can finance deals at attractive rates and stronger covenants. As noted, fundraising for private real estate debt is on the rise, capturing a large share of new capital as investors see opportunity to earn high yields by stepping into the lender role. For those focused on equity, consider targeting specific situations: e.g. provide preferred equity or mezzanine financing to owners who need to refinance (earning a preferential return and possibly an equity kicker), or partner with banks to take over or recapitalize OREO (owned real estate) assets. Joint ventures are another strategic tool – teaming up with operators who have distressed assets could allow you to acquire properties at a basis below market. For example, some investors are partnering with lenders to purchase non-performing loan portfolios at discounts, then foreclosing or restructuring to take control of underlying properties. This requires special servicing expertise but can be highly profitable if executed well. Another tactic is staggering your capital deployment to avoid going all-in at once. The market may not have fully corrected yet in some sectors, so pacing acquisitions over the next 12–24 months could yield better pricing on later deals. Keep an eye on policy as well – any signals of Federal Reserve rate cuts or easing could spur renewed investor competition (and bid prices up), so acting before the crowd returns is ideal. Some analysts believe the second half of 2025 or 2026 will bring a clearer turn in market sentiment; savvy investors want to be positioned ahead of that. In practice, this means doing the legwork now: identifying target assets, doing preliminary due diligence, and perhaps engaging in conversations with sellers or brokers of distressed properties, so that you’re ready to move quickly when the timing is right. Risk management is also part of strategy – maintain higher cash reserves than usual to weather any interim cash flow shortfalls (e.g. from higher debt service or vacancies). And consider interest rate hedging on any new debt: even if rates are high now, unexpected spikes could occur, so swaps or caps are prudent insurance. Finally, communication with stakeholders (investors, lenders, tenants) is key during turbulent times. Be transparent about your game plan to navigate the crunch – whether it’s focusing on asset management to drive NOI, selectively disposing of non-core assets to raise cash, or targeting acquisitions at lower prices to position for the rebound. Those who articulate and execute a clear strategy will attract capital and opportunities, whereas those who are indecisive may miss the window.

In closing, the current high interest rate, high debt maturity period is undeniably challenging for U.S. commercial real estate – but it is also creating opportunities for those who adapt. By understanding the scope of the Commercial Real Estate Debt Crunch and taking proactive steps – restructuring debt, refocusing portfolios on resilient assets, rigorously underwriting for risk, and deploying capital strategically – investors and developers can not only survive this period but potentially thrive in the recovery to follow. The CRE landscape is being reshaped financially and physically; those who innovate and stay disciplined will be best positioned to emerge stronger on the other side of the crunch.