Regulatory pressure is pushing lenders to resolve troubled commercial loans, prompting some highly leveraged property owners to sell and creating opportunities for cash buyers.
For the past several years, commercial real estate lenders and borrowers have relied on loan modifications and maturity extensions to delay recognizing losses on struggling properties. This practice, widely known as “extend and pretend,” has allowed troubled assets to remain classified as performing, masking the true level of market distress. Jason Brooks, a shareholder and the office managing shareholder at Buchalter, says the practice is nearing its end.
Banks are constrained in how many times they can modify a loan before accounting rules and regulators force them to classify the debt as nonperforming. Once that threshold is reached, lenders must either recognize the loss or require the borrower to sell. Brooks notes that many properties are already under full lockbox arrangements, giving banks control of cash flow and operations while owners remain on title. For these assets, he expects banks to begin forcing sales in 2026.
The End of Extend and Pretend
“In 2026, banks are expected to increase pressure on borrowers who cannot refinance or repay their loans,” Brooks says. “That will lead to more sales and opportunities for buyers.”
How the Numbers Stopped Working
Owners who acquired properties during the low-interest-rate period at high valuations and leverage levels are now struggling to meet debt obligations. Many purchased assets at cap rates around 3.75 percent, expecting to refinance at similar or lower rates. Instead, they now face refinancing at rates close to 7 percent. The gap between property income and debt service has become unmanageable for many.
Brooks describes borrowers who locked in mortgages at around 3.25 percent, only to see their rates reset to 7 percent or higher when variable-rate periods took effect. “They’re way upside down on their cash,” he says.
The problem is worse for those with floating-rate loans or adjustable-rate features. While these structures seemed safe when rates were near historic lows, rising rates have left owners unable to refinance on reasonable terms. Even properties with strong tenants and stable occupancy are in trouble if their debt structure no longer fits current market conditions. Brooks emphasizes that many of these forced sales are not about poor property performance but about unsustainable capital stacks.
Forced Sales Create Buying Opportunities
The coming wave of forced sales in 2026 is expected to reshape the market. Regulatory scrutiny and accounting rules are pushing banks to resolve problem loans, meaning owners who can’t refinance or bring in new equity will have no choice but to sell. These sales will often be at prices that reflect distress rather than the actual value of stabilized real estate.
Brooks represents ultra-high-net-worth family offices and private funds preparing to capitalize on these conditions. These buyers have capital on hand, don’t need to wait for fundraising or loan approvals, and can move quickly when good deals arise. “They can be more aggressive because they’re less reliant on outside capital, and the deals are better when the market slows,” Brooks says.
For these buyers, the key is to distinguish between properties with lasting operational problems and those forced into sale only because of their debt structure. The latter group presents the best opportunities: assets with solid fundamentals but owners who are out of options due to loan terms.
In this environment, buyers who can close quickly and offer certainty will have the upper hand in negotiations. Owners facing bank-imposed sales do not have time to shop for the highest price. Certainty and speed become more important than maximizing proceeds.
Buchalter’s Distressed Deal Experience
Brooks and his partner, Nick Dancy, who joined Buchalter from Kirkland & Ellis and has a background in real estate finance, are seeing more transactions in which sellers face lender pressure. The firm’s team, with experience at funds, family offices, and developers, brings practical insight to these deals.
“We know what matters when you’re in the client’s seat,” Brooks says. He cites a recent deal in which his client acquired land, secured entitlements, and obtained a construction loan for a luxury apartment building in San Diego, completing the process rapidly because the seller needed to exit quickly.
Brooks expects distressed and lender-driven sales to increase dramatically in the second and third quarters of 2026, as the window for loan modifications closes and banks face greater regulatory scrutiny. For buyers with available capital and the ability to act fast, the list of potential acquisitions is growing.
Looking Ahead: What 2026 Means for Buyers and Sellers
The commercial real estate market is heading toward a period of forced resolution. Banks can no longer indefinitely extend troubled loans, and many owners will be compelled to sell assets at prices below their original expectations. This will drive a significant shift in property ownership, with cash-rich buyers able to acquire high-quality assets at a discount.
For sellers, the reality is that only those who act quickly and realistically will have any control over the process. Waiting for better terms is not an option when a lender is demanding a resolution. For buyers, 2026 could bring the best opportunities in a decade, especially for those who understand the difference between operational distress and capital structure distress.
The next 18 months will test both lenders’ willingness to absorb losses and borrowers’ ability to inject new capital. For now, the winners will be those prepared to move decisively as forced sales accelerate and regulatory deadlines approach.
