- The federal deficit and debt trajectory have created a persistent competitor for real estate capital. With Treasuries offering yields that challenge core real estate returns, allocation committees are asking a question that would have been unthinkable five years ago: why take the illiquidity and complexity risk?
Situational financial distress among some real estate companies is emerging as an increasingly important source of both investment opportunity and capital markets risk. It is not systemic. It is specific to vintages, capital structures, and fund timelines where the math no longer works, and it is surfacing through property-level operations and financial pressures.
The industry’s response is more sophisticated than in prior cycles, but for certain assets, the gap between marks and executable values remains wide, and the translation from opportunity to realized returns is far from certain.
“Why real estate when I can get 5 percent risk-free?”
That question appeared in some form across a wide range of interviews conducted for this year’s report, not only among investors, but among developers evaluating new projects, lenders pricing risk, and operators assessing how their businesses compete for capital. It is not rhetorical. It is the backdrop against which every real estate decision is being made, and how the industry answers it will shape activity for the remainder of this cycle.
The fiscal backdrop is the reason the question has staying power. As of mid-2026, the federal deficit stands at approximately $1.9 trillion, and the Congressional Budget Office projects it will reach $3.1 trillion by 2036. Federal debt has crossed 101 percent of GDP and is on a trajectory toward 120 percent. Net interest expense now exceeds $1 trillion annually. The relationship between fiscal deficits, Treasury issuance, and long-term borrowing costs is not mechanically straightforward—monetary policy, inflation expectations, global demand for U.S. debt, and the term premium all intervene—but the directional pressure is clear: a government borrowing at this scale must attract capital, and the yields required to do so create persistent competition for every other asset class.
The planning case is higher for longer, and for most participants, the debate has moved from whether rates stay elevated to what the business looks like at this level.
What Higher for Longer Means for Financing and Allocation
The implications are showing up across the industry, in how projects are financed, how capital is allocated, how development is underwritten, and how existing assets are valued and traded.
Fundraising timelines have lengthened. Redemption queues at open-end funds remain elevated. New commitments are flowing disproportionately toward strategies that can demonstrate current income growth rather than projected appreciation alone. And refinancing activity continues to dominate lending volumes, as borrowers seek to extend or restructure existing obligations.
On the financing side, the maturity schedule is creating a rolling series of decision points across property types. Industry estimates indicate a substantial volume of commercial real estate debt is approaching maturity over the next 12 to 24 months. Many of these loans were originated with shorter loan terms during the low-rate period, meaning a significant share of outstanding debt must be refinanced, extended, or resolved at rates meaningfully higher than the original terms. Each maturity forces a concrete choice: does the borrower inject additional equity, does the lender extend at revised terms, or does the asset change hands? The cumulative effect of those decisions will shape transaction volumes, pricing benchmarks, and capital availability.
The broader macroeconomic environment compounds the challenge. Geopolitical disruption—tariffs, energy price volatility, or shifting sovereign capital flows—has become a recurring feature rather than an exception. Tariffs were cited by 33 percent of respondents as a top economic concern, a new entrant to the survey that reflects how quickly trade policy has become a variable in real estate decisions.
Situational Distress: The Differentiated Story
Distress came up in a number of interviews conducted for this year’s report. The frequency of those conversations is itself a signal. But the character of the distress matters as much as its prevalence.
This is not the systemic crisis of 2008 or the sector-wide collapse of office in prior downturns. It is situational, and the distinction that matters most is this: distress in this cycle is not necessarily synonymous with deteriorating property fundamentals. A building can be well-occupied, generating rent, and maintaining its physical condition while the ownership structure around it is under acute financial pressure such as leverage that no longer works at current rates, fund structures that cannot return capital within their intended timelines, or valuations that have not yet adjusted to reflect what a willing buyer would actually pay. The distress is arising from the financing, the ownership structure, or the timing of the investment, not only from the asset itself.
This distinction carries implications across the industry. For buyers with available capital, the opportunity set may be broader than a traditional distress cycle would suggest, because the underlying real estate in many cases is viable. For lenders, the question is how to manage a refinancing wave where the collateral is performing but the borrower’s capital structure is not.
Fund-life pressure is forcing many of the transactions that are occurring. A number of vehicles raised during the 2017 to 2020 period are now approaching or exceeding their intended hold periods, and capital partners are seeking either liquidity or greater transparency about terminal values. Net asset values may lag current market conditions in some cases, a function of appraisal timing, comparable sale availability, and the inherent difficulty of valuing illiquid assets in a thinning transaction market. The disconnect between reported and realizable values is contributing to a slowdown in capital recycling that affects every part of the industry.
Silent foreclosures and negotiated recapitalizations are occurring at a pace that transaction data does not fully capture. These are not distressed sales in the traditional sense, they are restructurings conducted between parties who often prefer to preserve relationships over maximizing recovery. The transactions that are happening tend to be more selective and more asset-specific than prior cycles, with buyers, lenders, and operators all conducting more granular due diligence on the individual properties involved.
Multifamily housing faces particularly acute pressure in certain vintages where assets purchased at sub-4-percent cap rates with floating-rate debt have since repriced by 300 to 400 basis points and cannot generate positive leverage at current rates. One interviewee projects that returns on multifamily assets purchased at peak pricing could remain near zero through approximately 2029, a sobering assessment, though not a universal one. Other interviewees point to the supply cycle turning in favor of existing multifamily assets and argue that patience will be rewarded, particularly in markets where new construction has effectively stopped.
“So much collective anxiety; everybody is triaging problems. It is equal parts the math, the arithmetic of higher rates, but psychology is playing as big of an impact.”
The Price Discovery Question
The more notable development in this cycle may be the growing sophistication of how firms manage through it. Several describe stress-testing capabilities that did not exist three years ago—the ability to model rate changes, commodity price shocks, and policy shifts across entire portfolios in a matter of days rather than weeks. One firm reports testing the impact of oil at $150 per barrel and cascading the results through every asset class in their portfolio within days of a geopolitical escalation. Whether that kind of capability translates into better investment decisions over a full cycle remains to be seen, but it represents an evolution in institutional risk management that is worth noting.
The fiscal and rate environment described in this trend is not a temporary condition. But the more consequential question for 2027 may be narrower: when does sufficient transaction volume occur to establish reliable pricing benchmarks? The forcing mechanisms are building, including fund expirations, loan maturities, and demands for liquidity from capital partners and lenders alike. Extend-and-pretend has deferred a reckoning in many corners of the market, but deferral has a shelf life. When enough assets trade to create genuine comparables, the industry, including investors, developers, lenders, operators, and the advisers who serve them, will have the clarity it needs to move forward, even if that clarity may be uncomfortable for some participants. The pace at which price discovery occurs will do more to shape the next phase of real estate activity than any single macroeconomic variable.
