The commercial real estate (CRE) sector has in recent years been focused on continued higher interest rates, which has increased the cost of borrowing in an environment of property valuations driven upward while low interest rates persisted, stressing both CRE deal volume and investor return. While interest rate cuts may be on the horizon, the challenges to CRE may go beyond the Federal Reserve’s next move on interest rates.

Attorney Kathleen O’Neill Burgener

There is a wave of loan maturities continuing this year into 2026, with estimates indicating more than $1.5 trillion in CRE loans set to mature by the end of 2026. Even if interest rates decline modestly during this period, market fundamentals suggest that cheaper debt alone will not fully resolve refinancing pressures, especially in sectors where asset values have fallen sharply, like in the beleaguered office market.

For years, some lenders and borrowers have relied on the post-Great Financial Crisis playbook of “extend and pretend”, in which loan maturities are extended and property valuation adjustments are deferred, in hopes of a complete underwriting and refinancing occurring under better market conditions at some future date. But we appear to be reaching the limit of waiting out these better conditions, so with the looming wave of maturities happening in an environment that has reached the limits of “extend and pretend”, we may start seeing more resetting of asset pricing.

Looking at Boston there are examples of this emerging reality, one being the foreclosure sale of an office tower downtown closing at a fraction of its outstanding CRE debt and thus a resetting of valuation for a future financing. Elsewhere in the city, it has been reported that a new luxury condominium project is being turned over to its lender amid sluggish sales. There have been additional recent transactions in downtown Boston involving the sales of office buildings at significant discounts from their prior purchase prices. These transactions are indications of owners being unable to refinance or service debt at current property valuations, which in turn creates an opportunity for the next owner to reset cost basis in the underlying property and finance the property at that lower valuation.

On top of financial headwinds, emerging environmental concerns may create additional costs and delays or other unknowns which may stress transactions and slow deal volume. One growing issue is the presence of pre- and polyfluoroalkyl substances (PFAS) in groundwater and soil. Known as “forever chemicals” for their persistence in the environment, PFAS are synthetic compounds used in manufacturing and consumer goods to repel water, grease and stains. They do not readily break down and therefore can accumulate in the environment and in living organisms, which has led to health concerns and regulatory scrutiny. In Massachusetts, the Healey-Driscoll Administration has introduced legislation committing $505 million toward PFAS remediation and clean water infrastructure, signaling both the scale of the problem and the potential for new compliance requirements that may affect property owners and developers.

The cost of owning and developing commercial property is also climbing in other areas. Property insurance premiums have risen, driven in part by the increasing frequency and severity of destructive weather events and wildfires. In some regions, some insurance carriers are withdrawing from certain property coverages altogether causing owners to seek more expensive alternatives. Meanwhile, construction costs remain elevated and uncertain. Ongoing supply chain disruptions, labor shortages, and a new tariff regime continue to erode predictability in pricing, creating potential for budget overruns and project delays.

The issues of refinancing risk, new environmental concerns, and the volatility of construction costs create an environment where lenders, equity investors, and buyers are applying heightened scrutiny to underwriting assumptions and potential returns on investment. While there may be some measure of relief on the horizon with a decrease in interest rates, the market still may see an extended period of cost basis reduction and an emphasis on fundamentals such as asset class, location, and tenant strength.

Kathleen O’Neill Burgener is a Real Estate Attorney at Sheehan Phinney in Boston. She focuses on commercial real estate, advising clients on finance transactions, acquisitions and dispositions and leasing matters. She has extensive experience representing borrowers and lenders in acquisition, refinance, construction and mezzanine loans.