The US commercial real estate (CRE) market is undergoing one of its most significant stress tests in decades. The combination of high interest rates, changing work habits, and—most critically—a pullback in bank lending is creating a slow-motion credit crisis across the sector.
Most CRE loans are structured with 5- to 10-year maturities. As these loans mature, property owners typically refinance with new debt. However, since the Federal Reserve began raising interest rates in 2022, banks have grown significantly more risk-averse. They’re no longer willing to refinance just any property—they’re cherry-picking only the strongest: prime locations, high occupancy, and strong cash flows.
That leaves a wide swath of office buildings, aging retail spaces, and underperforming mixed-use developments in trouble. These “non-prime” assets are now being turned away by traditional lenders and must turn to private credit markets for financing, at dramatically higher rates.
Private credit providers are stepping in, but at a steep price. Borrowers are now facing interest rates between 11% and 18%, depending on the perceived risk of the asset and borrower. For investors and property owners who once built financial models on 3-4% debt, these new rates are not just painful—they’re unsustainable. Margins are being decimated, and in many cases, positive cash flow is evaporating entirely.
This financing gap is threatening to trigger a wave of defaults, particularly in the office sector, which continues to grapple with reduced demand due to remote and hybrid work. National vacancy rates remain elevated, and valuations in urban centres like San Francisco and Chicago have dropped as much as 40–50% from their pre-pandemic highs.
Recent moves from major financial institutions underline the crisis. Dutch megabank ING just sold one of the largest office towers in San Francisco for 75% less than its 2019 value, a whopping $545 loss. JPMorgan, Goldman Sachs, and Capital One are also offloading billions in office-related debt. These distressed sales are not only signalling broader industry weakness—they’re actively resetting property valuations downward.
Banks are trying to limit exposure before defaults rise further, leaving many borrowers with no institutional refinancing options. The ripple effect is profound: distressed asset sales, declining property values, and pressure on regional bank balance sheets.
The current environment is bifurcating the market. High-quality industrial and multifamily properties in strong locations can still find bank financing, often with new equity injections or at higher rates. But Class B and C properties—those in second-tier cities or with weaker tenant profiles—are effectively being cut off.
This creates a dangerous imbalance where only the “best” survive while the rest are forced into high-cost private credit or liquidation. It also stifles recovery by limiting capital access to potentially viable but currently underperforming assets.
The CRE market’s correction is not just about falling values—it’s about liquidity. Real estate depends on debt, and when that flow of capital dries up, even fundamentally strong assets can falter. The slow pace of refinancing, combined with elevated rates, is choking cash flow and triggering fire sales.
Many analysts believe we are entering a long period of deleveraging in the sector. That means more distressed sales, write-downs, and reduced appetite for risk across banks and institutional lenders. But it also opens the door for strategic investors and private credit products to step in—offering both capital and structure in a dislocated market.