You’ll notice something that wasn’t there five years ago if you stroll through any major American city today, such as midtown Manhattan, San Francisco’s Financial District, or Chicago’s Loop. lobbies that are empty. Cleaning personnel are the only ones who light the dark floors.
Coffee shops that once had lines that stretched to the sidewalk in the morning are now closing before noon. The structures remain intact. However, it is difficult to exaggerate how the debt behind them is starting to crumble.
| Category | Detail |
|---|---|
| Sector | Commercial Real Estate (CRE) — Office, Retail, Multifamily, Industrial |
| Total Outstanding CRE Debt | ~$5 trillion (U.S. market) |
| Debt Maturing in 2026 | Approx. ~$875 billion (Mortgage Bankers Association estimate) |
| Peak Year for Maturities | 2025 (~$957 billion) — 2026 represents a ~9% decline |
| Office Vacancy Rate Trend | Rising sharply post-pandemic; values down ~35% from peak (Fitch Ratings) |
| Worst Single Sale Recorded | Midtown Manhattan office building sold at a 97.5% discount (July 2024) |
| Primary Debt Holders | Regional and smaller U.S. banks (~70% of bank-held CRE mortgages) |
| Total Bank CRE Exposure | ~$3 trillion held by U.S. banks and lenders |
| Congressional Response | Bipartisan bill proposing 20% tax credit for office-to-residential conversions |
| Fed Chair’s Assessment | Jerome Powell: CRE risk “will be with us for some time, probably for years” |
| Key Risk Phrase | “Extend and pretend” — loan extensions masking true distress |
| Distressed Properties | ~$95 billion in U.S. properties in distress or at risk |
On their own, the numbers are astounding, but they rarely provide the whole picture. The Mortgage Bankers Association estimates that $875 billion in commercial and multifamily real estate loans will mature in 2026. This amount comes after an even bigger wave in 2025. These are not financial instruments that are abstract.
These are the mortgages behind the glass towers where insurance companies occupied whole floors, law firms charged by the hour, and “location, location, location” was taken for granted. Now, a large number of those floors are empty. When borrowers signed the paperwork in 2015 or 2019, they had no idea that many of those loans would be due at interest rates.
Technically speaking, the worst of the maturity wave may have passed its peak. However, a receding tide does not guarantee that the beach is safe, and there is still a significant refinancing challenge. Rates for owners who borrowed at 3.5% are now almost double that. Instead of throwing good money after bad, some are opting not to refinance at all. In July, an office building in midtown Manhattan sold for 97.5% less. Not a typo. Such a figure is not indicative of a market correction. It is recorded as a demolition.
The “extend and pretend” era, in which lenders and borrowers covertly decided to roll over problematic loans in the hopes that the market would improve, is perceived by the industry as coming to an end. For a while, it was effective. Everyone found it easier to turn away as sales came to a standstill and it became difficult to assess the true value of any given building.
However, operating costs continued to rise. The cost of insurance increased significantly. The anticipated recovery in vacancy rates did not materialize. And now, both literally and figuratively, the postponed reckoning is coming with compound interest.
This becomes truly concerning when it comes to the regional banking system. The balance sheets of regional and smaller lenders, which lack the diversified revenue streams and capital cushions of the large national banks, contain about 70% of bank-held commercial real estate mortgages. In one way or another, almost all banks lend money for commercial real estate, and for nearly half of them, this is their biggest loan category.
When New York Representative Ritchie Torres referred to excessive CRE exposure as “a ticking time bomb within the banking system,” he wasn’t lying. Cutting rates could relieve some of the pressure on the margins. A loan on a partially vacant office building that has lost a third of its value will not be restructured.
It should be noted that some investors are seeing opportunities in the wreckage. Due to their willingness to provide financing that traditional underwriting would not touch, private credit firms and specialty lenders have entered markets where traditional banks have retreated. That’s a logical reaction from the market. When a building requires a specialty lender to stay afloat, it’s also a sign of how disorganized things have become.
Though unavoidably sluggish, the legislative response has been deliberate. A proposed 20% tax credit for qualified conversion costs is part of a bipartisan group of lawmakers’ efforts to facilitate office-to-residential conversions. Developers who set aside 25% of converted units for affordable housing will receive a 90% tax abatement from New York City. These are really excellent suggestions.
They should act more quickly because they are dealing with two crises at once: a persistent housing shortage and an inventory of vacant offices. Not all office buildings can be converted, which is the issue. The economics just don’t add up, the plumbing doesn’t support residential use, or the floor plates are too deep. Conversion is not a panacea. For a very large wound, it is a partial remedy.
It’s difficult not to consider the larger lesson that keeps being relearned as you watch all of this happen. Physically, financially, and psychologically, real estate has a sense of permanence. The construction of a 50-story structure seems like a declaration of the future. However, the underlying debt has a maturity date. The leases of the tenants expire.
The employees can use their laptops from any location. The recent era of the commercial real estate industry was built on presumptions about where people would congregate and how they would work, which were subtly disproved by an unanticipated pandemic. The structures remain intact. The presumptions aren’t.
In testimony before the Senate, Federal Reserve Chair Jerome Powell stated unequivocally that the nation will face this risk “probably for years.” That’s not panic; rather, it’s a realistic assessment of a market with limited flexibility and a lengthy path to stability, if it returns at all.
