🚨 CRE Workouts Enter a More Forced Phase: What Commercial Property Owners Must Do Now 🏢⚠️

📉 Commercial Real Estate Distress Is Rising: How Loan Workouts, Receiverships & Refinancing Challenges Are Reshaping CRE 📈🏦

CRE Workouts Enter a More Forced Phase: What Investors and Business Owners Need to Know

The commercial real estate market is entering a new chapter in the current distress cycle. For the past several years, many lenders have relied on "extend and pretend" strategies—granting extensions and hoping interest rates would decline enough to restore refinancing opportunities.

Today, that era appears to be ending.

With approximately $1 trillion in commercial real estate debt maturing this year, lenders are becoming increasingly selective about which properties and sponsorship groups warrant additional support. Borrowers who proactively address challenges are finding opportunities to restructure debt, while those waiting for market conditions to improve may face far more difficult outcomes.

For commercial real estate investors, developers, and business owners, understanding the changing workout landscape is critical.

Why CRE Workouts Are Becoming More Common

Many commercial loans originated between 2020 and 2022 were structured in an extremely low-interest-rate environment.

At the time:

·Interest rates ranged from 3% to 4%

·Cap rates were compressed

·Property values reached record highs

·Debt service coverage ratios appeared strong

Fast forward to today:

·Interest rates are often 7% or higher

·Refinancing proceeds have declined

·Property values have adjusted downward

·Cash flow margins have tightened

The result is a growing number of properties that cannot refinance into replacement debt without significant borrower equity contributions.

Many owners now face difficult questions:

·Inject additional capital?

·Sell at a discount?

·Negotiate a workout?

·Bring in new equity partners?

·Hand over control?

The End of "Extend and Pretend"

For much of the current cycle, lenders preferred loan extensions rather than foreclosures.

Why?

Because:

·Property values were uncertain

·Market conditions were volatile

·Interest rates were expected to decline

·Lenders hoped fundamentals would recover

However, many lenders are now recognizing that certain assets face structural rather than temporary challenges.

This shift has created a new environment where lenders increasingly expect borrowers to:

·Communicate early

·Provide updated financial reporting

·Present realistic business plans

·Contribute additional equity

·Demonstrate operational improvements

The strongest borrowers are approaching lenders before maturity dates become crises.

Why Capital Stacks Have Become More Complicated

One major difference between today's market and prior cycles is the complexity of capital structures.

Many commercial properties now contain multiple layers of financing:

Senior Debt

Often provided through:

·Banks

·Credit unions

·Life companies

·CMBS lenders

Mezzanine Financing

Additional leverage layered behind senior debt.

Preferred Equity

Investors seeking higher returns may provide preferred equity capital with repayment priority.

Private Credit

Private debt funds have become increasingly active participants in commercial real estate financing.

EB-5 Capital

Many development projects contain foreign investment capital through EB-5 programs.

The challenge?

Every stakeholder has different objectives.

A restructuring that benefits the senior lender may hurt mezzanine lenders.

A preferred equity solution may dilute ownership.

An extension may not satisfy private credit investors.

As a result, workouts frequently take longer and require extensive negotiations.

Receiverships Are Becoming More Common

Historically, receiverships were viewed as a sign of failure.

Today, they are increasingly viewed as a business tool.

A receiver is an independent third-party professional appointed to oversee a property during distress.

Receivers may:

·Stabilize operations

·Complete construction projects

·Manage tenants

·Preserve cash flow

·Protect asset value

In many cases, lenders and borrowers agree to receiverships voluntarily because they create breathing room while long-term solutions are negotiated.

Rather than signaling defeat, receiverships often represent an effort to maximize recovery and preserve equity.

Multifamily Distress Is Growing

Office properties continue to dominate headlines.

However, multifamily assets are increasingly drawing attention.

Several Sun Belt markets have experienced:

·Slowing rent growth

·Increased concessions

·Elevated operating expenses

·Rising insurance costs

·Property tax increases

·Large amounts of new supply

At the same time, many acquisitions were underwritten using aggressive assumptions regarding rent growth and refinancing conditions.

As these assumptions collide with reality, more multifamily loans are entering special servicing or restructuring discussions.

Texas has become a focal point of this trend, particularly among properties that relied heavily on value-add execution strategies.

Distressed Debt Investors Are Watching Closely

Private lenders and distressed debt funds continue to raise capital for opportunities.

However, many are taking a selective approach.

Investors generally prefer:

✅ Stabilized properties

✅ Performing cash flow

✅ Discounted purchase opportunities

✅ Strong sponsorship

They are often less interested in:

❌ Highly complex capital stacks

❌ Major construction risk

❌ Significant operational deficiencies

❌ Assets requiring extensive repositioning

This selective environment creates opportunities for well-positioned borrowers while increasing pressure on weaker assets.

What Borrowers Should Do Right Now

If your commercial property loan matures within the next 24 months, now is the time to prepare.

Review Loan Maturity Dates

Know exactly when debt obligations come due.

Evaluate Refinancing Options Early

Do not wait until the final months before maturity.

Strengthen Financial Reporting

Provide lenders with accurate and transparent information.

Improve Property Performance

Focus on occupancy, collections, tenant retention, and expense management.

Explore Capital Solutions

Consider:

·New equity partners

·Preferred equity

·Mezzanine capital

·Supplemental financing

·Partial paydowns

Communicate with Lenders

Borrowers who engage early typically achieve better outcomes than those who avoid difficult conversations.

Final Thoughts

Commercial real estate workouts are entering a more forced phase.

The industry is transitioning from patience to accountability.

Lenders are no longer relying solely on future rate cuts to solve refinancing challenges. Instead, they are evaluating which properties, business plans, and sponsorship groups have a realistic path forward.

The owners most likely to preserve equity are those who:

·Act early

·Understand their numbers

·Present realistic valuations

·Improve operations

·Collaborate with lenders

Commercial real estate cycles create both risk and opportunity. Investors who address problems proactively often emerge stronger, while those who delay action may find decisions being made for them.

If you have a loan maturing in the next 12 to 24 months, now is the time to begin evaluating your options.

Bill Rapp, CCIM
Director | CommLoan

📞 281-222-0433
📧 [email protected]
🌐 https://billrapp.commloan.com/

Commercial Real Estate Financing Nationwide

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