High borrowing costs push commercial distress sales higher

Elevated borrowing costs are pushing more commercial property owners into distressed sales in 2026. From January through September, the dollar volume of distressed transactions climbed 26.4% from a year earlier, reaching $13.2 billion versus $10.5 billion in the prior-year period, according to MSCI data summarized by The Real Deal.

The increase matters, but it does not mean commercial real estate is broadly collapsing. Nondistressed transaction volume rose 50.3% over the same period, while total deal volume increased nearly 50% to $560 billion. August alone accounted for $107 billion in sales.

For sellers, that combination creates a divided market: financing pressure is forcing some owners to sell, while better-capitalized buyers are actively pursuing properties. The practical issue is whether a property will be judged as a normal investment opportunity or discounted as a time-sensitive sale.

Distress is rising without dominating the market

Distressed properties represented 2.4% of transaction volume during the first nine months of 2026. In the third quarter, their share fell to 1.5%, the lowest quarterly level in two years. That is important context for owners who may fear that every comparable sale will suddenly be a foreclosure, lender takeover or deeply discounted disposition.

Debt funds have also helped keep more troubled properties away from forced-sale conditions. Some lenders and alternative capital providers are working with owners on extensions, restructurings or other solutions rather than immediately pushing assets to market. That can give a seller more time, but it does not make the underlying financing problem disappear.

A higher transaction count can expand the buyer pool, yet it does not guarantee stronger offers. Buyers financing an acquisition still have to make the property’s income support the cost of debt. If that math is tight, they may lower their price, seek seller financing, demand repair credits or require a longer investigation period.

Sellers should therefore avoid reading the headline increase in overall sales as proof that pricing has fully recovered. More deals can simply mean that buyers and sellers are finally accepting current financing conditions after a period of waiting.

Buyer financing will shape days on market and offer strength

Properties with stable occupancy, credible financial records and limited near-term capital needs are better positioned to attract multiple bidders. Assets with expiring leases, deferred maintenance or uncertain income are more likely to face conservative underwriting. Buyers may still appear, but their offers can contain larger contingency packages and lower valuations.

Days on market will depend partly on how quickly a seller addresses financing reality. An aspirational list price based on older, cheaper debt can cause a property to sit while buyers repeatedly reach the same lower conclusion. A stale listing can then encourage bargain hunters who assume the owner’s leverage is deteriorating.

Offer strength should be evaluated beyond the headline price. Sellers need to compare proof of funds, lender involvement, deposit size, inspection rights, financing contingencies and the proposed closing schedule. A higher bid that depends on aggressive loan assumptions may be weaker than a slightly lower offer backed by committed capital.

Before choosing an offer, owners should also request a property-specific net sheet. The calculation may include the loan payoff, delinquent interest, prepayment charges, unpaid taxes, commissions, legal expenses, buyer credits and essential repairs. A price that looks acceptable at first glance can leave little equity after those deductions.

Owners approaching a loan maturity should determine their options before publicly marketing the asset. Knowing whether a lender will extend, restructure or require a payoff clarifies the seller’s actual timeline. It also reduces the risk of accepting a contract that cannot close before a critical debt deadline.

Multifamily sellers face the clearest distress signal

Multifamily recorded a 62.8% annual increase in distressed sales, and it was the only major sector where distressed activity grew faster than nondistressed activity. That does not establish a new value for every apartment property, but it gives buyers another reason to examine operating income, insurance, taxes, repairs and existing debt closely.

Owners of small apartment buildings should expect buyers to test whether rents can support today’s financing costs without optimistic assumptions. Clean rent rolls, documented expenses, lease histories and repair records can help distinguish a functioning property from distressed competition. Missing or inconsistent records give buyers room to price in additional risk.

Industrial properties posted the largest percentage increase in distressed sales at 167.6%, but the dollar amount was only $375 million and represented less than 1% of that sector’s transaction volume. Lodging had the largest distressed share at 8.9%, followed by office at 7.8%. Those figures show why property type and local conditions matter more than a national distress headline alone.

Home sellers should treat the report as context, not a comp

MSCI’s figures cover commercial transactions, not the typical owner-occupied house. A distressed office tower or hotel is not a valid comparable sale for a nearby single-family home. Residential buyers use different loan products, evaluate properties differently and often make decisions based on personal housing needs rather than investment yield.

Commercial distress can still affect homeowners indirectly. A troubled apartment complex, vacant office property or struggling retail center may influence neighborhood perception, employment patterns or future development plans. Sellers near those properties should ask whether buyers are raising such concerns and prepare factual answers rather than assuming the commercial sale automatically reduces home value.

Homeowners selling mixed-use property, a small rental portfolio or a residence with meaningful income-producing space should pay closer attention. Their buyer pool may include both residential and commercial borrowers, making financing terms especially important. Separating personal living space from documented property income can make the asset easier for buyers and appraisers to understand.

The central lesson is straightforward: higher borrowing costs are producing more distressed sales, but they are not eliminating buyers. Sellers who know their payoff, document the property’s performance and compare offers by certainty as well as price are in a better position to protect net proceeds.