Dear Colleagues and Friends,
The Great Reset in commercial real estate isn't coming—it's here. As we enter 2026, the recalibration predicted eighteen months ago has materialized, transforming how we structure financing, underwrite deals, and evaluate opportunities across the CRE landscape. While the Federal Reserve cut rates three times in 2025 (totaling 75 basis points), bringing the federal funds rate to a range of 3.50%-3.75%, the path forward reveals a market fundamentally changed from the low-rate era of 2017-2021.
The first step: recognizing that we've arrived at the reset, not merely anticipating it. Sitting around and waiting for long-term interest rates to return to near-zero has proven not just optimistic, but unrealistic. Even with inflation tracking at 2.7%-2.8% (still above the Fed's 2% target), the 10-year Treasury now stands at 4.16%, and stabilized property financing ranges from 5.7% to 7%—substantially higher than the 3%-4.5% environment of just a few years ago. The Federal Reserve's own projections suggest rates settling around 3% by late 2026, with most economists forecasting only one or two additional cuts throughout the year. [1]
With long-term Treasury rates at these levels, most investors must now price prime properties using capitalization rates in the 6%-7% range or higher to avoid negative leverage. The transition from a 4% cap rate environment to a 6% cap rate represents a 33% decline in property values, assuming net operating income (NOI) remains stable—a mathematical reality that has reshaped the entire market.
The NOI Challenge: Beyond Rate Resets
That brings us to the second dimension of the Great Reset: changes to NOI. The 2025 performance data reveals a bifurcated market. While industrial properties posted NOI growth of 2.6% and shopping centers achieved 4.3% growth, the office sector experienced negative 1.2% NOI growth, and self-storage declined 1.9%. Multifamily remained positive but modest at 1.7%. [2]
The challenge extends beyond rental rate growth. Major operating expenses—real estate taxes, insurance rates, personnel costs, and repair and maintenance expenses—have increased at rates matching or exceeding rental growth across many property types. This expense pressure has created a dual headwind: declining values from higher cap rates combined with eroding NOI from compressed operating margins.
The Maturity Wave: From Prediction to Reality
The anticipated "wall of maturities" has proven even more formidable than originally forecast. Approximately $950 billion in CRE mortgages matured in 2024, followed by $957 billion in 2025—representing 20% of outstanding balances. Many loans extended from 2023 and 2024 shifted into 2025, as borrowers and lenders hoped for more favorable refinancing conditions.
The data reveals the strain on the system: by mid-2025, over $23 billion in CMBS loans sat unresolved past their maturity dates, unable to refinance under current conditions. CMBS delinquency rates reached 7.30% in December 2025, with the office sector hitting 11.31%. While multifamily delinquency moderated to 6.64% and retail declined to 6.92%, these figures remain substantially elevated compared to historical norms.
Lenders whose underwriting factored in conservative debt service coverage ratios and traditional debt yield tests have largely weathered the interest-rate storm without major losses. These disciplined lenders remain active and stand to gain considerably as the Reset continues. The moment is especially ripe for those ready to lend in sectors like industrial, retail, and multifamily, where borrowers who secured financing during the low-interest-rate window between 2017 and 2020 now face refinancing at dramatically higher rates.
Where We Stand—and Where We're Headed
The "pretend and extend" era has effectively ended. The aftermath of the 2008 global financial crisis created a misplaced sense of permanence around the low rates that followed, leading many developers, investors, and debt providers to misinterpret a decade-long temporary phase as the new normal. Interest rates in the 6%-7% range—or higher—represent a return to historical norms, not an aberration.
The disconnect between seller expectations and buyer willingness has narrowed considerably through 2025. Transaction volumes tell the story: Q1 2025 saw $69.3 billion in activity, Q2 climbed to $115 billion (up 3.8% year-over-year), and Q3 reached $112 billion.[3] Most significantly, Q4 2025 transaction volume exceeded $100 billion, marking the third consecutive quarterly improvement and representing a 15%-20% increase from 2024 levels.
Altus Group
Borrowers who locked in low, fixed-rate financing have held their positions, avoiding distressed sales. However, as loans matured throughout 2025, borrowers faced the decision to refinance at substantially higher rates—assuming NOI growth supported higher debt service—or sell at reset valuations or infuse significant equity to maintain lower leverage.
Asset-Specific Opportunities in the Reset
The Great Reset has created stark differentiation across property sectors:
Data Centers and Digital Infrastructure: The clear standout of 2025, with demand surging 8.9% and vacancy remaining near historic lows at 1.9%. Pre-leasing of under-construction space consistently exceeded 75% across primary markets, though power constraints and community opposition continue to limit supply growth.
Industrial: Since 2012, the best-performing CRE sector has shifted from self-storage to industrial to data centers, with annualized total returns for the best-performing sector averaging 17%. Industrial faces an inflection point as construction has declined 62% since 2022, positioning the sector for a move toward equilibrium with vacancy expected to peak near 7.6%.
Retail: Demonstrating remarkable resilience, with disciplined development keeping supply tight. Essential retail (grocery-anchored centers) maintains occupancy around 95%, with 2026 construction anticipated to drop 37%, supporting approximately 1.5% rent growth. Retail has ranked first in total returns among the four major NCREIF property types for eight consecutive quarters through Q3 2025.
Multifamily: After absorbing the 2022-2023 construction boom, the sector has stabilized. Net absorption finally surpassed new deliveries in late 2025 for the first time since early 2022. Strong renter demand and high home prices (with homeownership increasingly unaffordable) are driving occupancy gains, setting the stage for improving rent growth in 2027-2028.
Office: The most challenged sector continues its bifurcation. Vacancy peaked in 2025 and is expected to fall below 18% by the end of 2026, driven primarily by the removal of obsolete inventory through adaptive reuse conversions and, to a lesser extent, improving demand for Class A space in select markets. Office-to-apartment conversions reached a record 70,700 units in 2025, up from 23,100 in 2022—a more than threefold increase. These conversions now represent approximately 42% of all future adaptive reuse apartment projects.
The Adaptive Reuse Reality
Office adaptive reuse has become more than a concept—it's a strategic necessity. CBRE estimates roughly 81 million square feet of office space is in the conversion pipeline to alternative uses (multifamily, hotel, life sciences), and conversions plus demolitions exceeded new office construction for the first time in 2025.
Major cities have responded with policy tailwinds: easing zoning restrictions, adding tax abatements, and providing grants to encourage office-to-residential conversions as part of downtown revitalization and housing policy. The ESG narrative around reducing embodied carbon versus ground-up construction has helped attract impact-oriented capital. [7]
However, from an underwriting perspective, conversion only pencils for a relatively small subset of buildings. Physical constraints (floor plate depth, window lines, core location, slab-to-slab heights), zoning hurdles, and elevated construction costs mean that viable conversions require deeply discounted basis—typically through distressed sales—combined with physically suitable buildings (pre-war or narrow floor plates), strong residential demand, and supportive local incentives.
The Capital Markets Awakening
Perhaps the most significant development of 2025 has been the reawakening of CRE debt markets. Through the beginning of 2025, new loan volume increased 13% from the end of 2024 and over 90% from the prior year—a recovery to levels not seen since early 2023. Commercial mortgage loan spreads tightened by 183 basis points, enabling some sponsors to pursue early refinancings. [5]
Private credit has emerged as a vital force in the market. The global private credit market reached $238 billion in 2024 and is expected to reach $400 billion in assets under management by the end of the decade. As of mid-2025, approximately $585 billion in CRE dry powder stood ready for deployment.
With traditional lenders maintaining conservative approaches while balancing regulations and sector uncertainty, private credit providers have offered flexible and efficient solutions. The maturing loan environment—with approximately $1 trillion in loans set to mature by the end of 2026—has created a funding gap that private lenders are uniquely positioned to fill, often on terms that better reflect current market conditions. [6]
CMBS lending recorded a 110% year-over-year jump through early 2025, driven by single-borrower deals. Reduced tightening of lending standards has historically been a reliable precursor to capital value improvements in commercial real estate. Bank loan loss provisions coming in below previous estimates and lower-than-expected net charge-offs both point toward improving health in banks' CRE loan portfolios.
SitusAMC NCREIF Fund Level Returns
The Next Phase of the Great Reset
Advancing the market through 2026 requires a continued shift in collective thinking. After all, one investor's distressed situation remains another investor's opportunity. A well-performing building—such as a multifamily property within an infill market with high barriers to entry—might simply have the wrong debt structure for current conditions. With forced sales due to maturing, low-rate loans, new ownership groups can acquire assets at reset basis, creating opportunities for lenders and enabling projects to be revived with reinvented capital stacks.
Capital markets have rebounded as pricing stabilized and investors returned. Most global leaders expect improved revenues, expenses, and property fundamentals through 2026. Investment sentiment remains upbeat, especially for digital infrastructure, selective office, and alternative asset types, with the U.S. continuing as a top target market.
Conclusion: Embracing the Reset
The Great Reset is no longer theoretical—it's operational reality. Fresh capital, disciplined underwriting, and willingness to invest and lend at current market rates will be critical to successfully navigating this environment. The opportunities are substantial for those who recognize that we're not returning to the 2017-2021 low-rate era, but rather entering a new cycle where returns will be driven primarily by income and operational execution, not cap rate compression.
Strategic partnerships, flexible capital commitments, rigorous risk management, and measured technology adoption (particularly AI) are seen as essential strategies for navigating 2026. As interest rates moderate toward 3% by late 2026, the focus must remain on fundamentals: rent growth, expense management, and disciplined investment that recognizes higher rates demand a more cautious, long-term approach to growth.
For investors, lenders, and operators who adapt to this new reality—who recognize that income-driven returns, conservative leverage, and sector selection will define success—the Great Reset represents not just a challenge to be survived, but a generational opportunity to position portfolios for sustainable, long-term performance in a more rational, fundamentally sound commercial real estate market.
Respectfully,
Max Ozkural Editor | CIO
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