The year 2026 is confronting the commercial real estate financing market with notable challenges. Alongside geopolitical conflicts, inflation and oil price shocks, interest rate rises at both the short and long ends of the yield curve are taking centre stage. Leading market participants emphasise that it is not so much the absolute interest rate level as the constant movement in terms that is complicating transactions.
Stephanie Wiggins, head of agency and FHA production at PGIM, explained that the greatest hurdle lies in adapting to interest rate volatility. A borrower could adjust to a ten-year US Treasury yield of 5 per cent if that was considered a reliable baseline. Substantial changes to financing assumptions during an ongoing closing, by contrast, are far harder to absorb.
Pressure on valuations and scarce equity
Industry-wide, the volatility of interest rates has led to term sheets being adjusted, loan proceeds reduced and valuations corrected. This has hampered transaction activity during a period that had been forecast at the start of the year as a recovery year. Charlie Rose, managing director of the Invesco Commercial Real Estate Finance Trust, noted that the recovery in transaction volumes had faced headwinds from persistently high long-term interest rates. If this environment persists, further pressure on property values and deal completions is to be expected.
Compounding matters is the hesitation among equity providers. Chris Lawton, head of lending at Nuveen Green Capital, pointed to higher financing costs and subdued deal volume resulting from macroeconomic factors such as the appointment of the new Fed Chair Kevin Warsh. Equity providers that are usually keen to invest have been holding back, complicating the completion of capital structures. In addition, fierce competition among lenders is exacerbating the situation.
Opportunities for selective and cleaned-up portfolios
Despite these conditions, individual players are recording notable business successes. Michael Lavipour, head of lending at Affinius Capital, reported that his company spent most of 2025 resolving non-performing loans. This paved the way for a dynamic start to the current year. From January to June, Affinius provided loans totalling more than $8 billion. Despite a subdued transaction market, the twelve months to 30 June were the most productive in the firm's history.
Some lenders are deliberately using the environment to capitalise on distressed exposures or opportunistic situations. Tim Johnson, global head of Blackstone Real Estate Debt Strategies, highlighted that periods of heightened volatility often offer attractive investment opportunities as markets adjust to the interest rate environment and shifting risk appetites.
Nevertheless, selectivity remains the decisive criterion for market success. Chris Duey, head of private debt portfolio management at Principal Asset Management, emphasised that the biggest challenge is maintaining discipline in the face of mounting competition. The recovery continues to unfold in a highly uneven manner, depending on property type, asset quality and the respective submarket.
