Commercial Real Estate Risk Is Compounding Beneath the Surface

 “Common sense underwriting matters most when the cycle turns.”

Commercial real estate is not residential real estate with bigger numbers. It operates on different psychology, different capital structures, and very different risk exposure.

In today’s environment, commercial real estate distress is being driven by one core dynamic: refinancing pressure colliding with higher interest rates.

Many commercial mortgage loans were originated in a low-rate world. As those loans mature, the math simply doesn’t work the same way.

This is where non-performing loans begin to surface.

The complexity of commercial real estate compounds the issue. Properties often depend on a narrow tenant base, concentrated income streams, and layered debt structures.

When cash flow tightens, optionality disappears quickly.

And unlike residential borrowers, commercial borrowers often make strictly economic decisions, which changes how workouts and negotiations unfold.

The lessons from the 2008 financial crisis remain relevant: leverage amplifies everything. High leverage works beautifully in a rising market. In a stalled or declining one, it compresses equity at speed.

There is also a broader question facing the system: how exposed are banks to commercial real estate loans that no longer underwrite at current rates?

Bank insolvency risk doesn’t require collapse — it requires enough pressure across enough balance sheets to change behavior. When banks pull back, liquidity disappears. When liquidity disappears, price discovery follows.

Fairness, discipline, and borrower psychology will define this next chapter. Negotiations done with respect often preserve value. Panic-driven enforcement rarely does.

The commercial real estate market may not return to the ultra-low interest rate environment that inflated valuations for more than a decade. That shift alone changes the long-term equation for investors.

If you want a deeper discussion on non-performing loans, borrower psychology, and where commercial real estate risk may be heading next, you can get the truth from Mendy Pollack in this episode of Debt Doctor.

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 – Bill Bymel, Debt Doctor

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