Refinancing costs are reshaping how commercial real estate lenders and borrowers talk about troubled loans.
Instead of assuming that every asset can be rolled forward with another extension, many players are confronting the reality that debt once priced in the 3 to 4 percent range is now resetting closer to 7 percent or higher, with dramatically different math for both sides of the table. The result is a new kind of workout conversation that pivots less on buying time and more on whether a given business plan, sponsor and capital stack can support today's cost of money.
For literally years now, CRE lenders and borrowers have engaged in a dance. Properties that were financed at ultra-low rates and with high leverage reached maturity and could not qualify for refinancing, at least not without significant additional equity investments. One loan after another received extensions under the magic of "extend and pretend," which pushed looming problems into the future and kept them off lenders' balance sheets.
That playbook is breaking down as maturities collide with higher rates and tighter underwriting. The Urban Land Institute has released a new analysis noting that approximately $1 trillion in CRE debt comes due in 2026. Panelists at the ULI Spring Meeting said borrowers are "entering a more demanding refinancing environment." They also said borrowers wanted greater transparency, earlier communications and reasonable business plans to avoid bankruptcy, foreclosure or receivership, according to the organization.
The numbers behind these conversations have changed significantly. Loans that once priced between 3 percent and 4 percent are now being refinanced at closer to 7 percent or even higher and that jump is blowing open valuation gaps and making recapitalizations far more challenging. Owners are facing not just higher debt service but also lower proceeds, as lenders apply stricter underwriting and offer less leverage, which in turn forces sponsors to bring in new equity or rethink their strategies altogether.
With this backdrop, the focus of workouts is shifting from delay to triage. To manage their decisions, lenders need more and better information to understand the true state of a given loan and property, including operating performance, leasing prospects, sponsorship strength and capital plans.
Borrowers who move ahead with redevelopment or repositioning without first involving their lenders can quickly make a difficult situation worse in an environment where missteps are less forgiving.
"A lot of times, when I step into a project, there may already have been movement toward that redevelopment without the lender being brought in," Matthew Mason, executive director, head of real estate fiduciary services in the professional services division at Hilco Global, said during the ULI Spring Meeting.
"That's where things get really scary."
Higher costs and thinner margins are also magnifying the challenges posed by layered capital stacks. Alan Tantleff, senior managing director at FTI Consulting, said managing distressed workouts becomes more complicated when there is CMBS, mezzanine debt, EB-5 financing, preferred equity and private credit lenders in the mix. With more players at the table, each with its own return hurdles and remedies, it becomes harder to craft a restructuring that works when the underlying debt is far more expensive than when the deal was first underwritten.
Much of the ULI discussion focused on receivership and alternative restructuring tools as ways to stabilize troubled projects that can no longer pencil under traditional refinancing assumptions. According to Mason, lenders are sometimes willing to advance more funds but may not trust the existing ownership group to successfully execute a turnaround strategy in a higher-rate environment.
That is where bringing in a receiver or a different operating partner can be part of preserving value, not just a sign of distress. Brett Axelrod, partner at Fox Rothschild, said that receivership is not necessarily a sign of failure and can, in some cases, be an essential step in stabilizing a property.
"[You] may have to bring in new capital that dilutes [the borrower's] equity position," Axelrod said. "But it's better to own a smaller piece of a completed, functioning project than 100 percent of a failed one."
Taken together, these pressures are redefining what a CRE workout looks like. The conversation is no longer simply about extending maturities to wait out the cycle; it is about whether cash flows can support today's refinancing costs, which capital structures can be repaired and how quickly lenders and borrowers can align on realistic plans. In that environment, the most successful players may be those who adjust fastest to the new price of debt—and are willing to have tougher, more candid discussions earlier in the life of a troubled loan.
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