Commercial Real Estate Faces Reality: Delinquencies, Declines, and “Extend & Pretend”
November 2, 2025 – by Gary McKae
From rising delinquencies on car loans to falling residential rents and home prices across the nation, the commercial real estate (CRE) market is no longer the “protected class” it once seemed.
Office CMBS Delinquencies Hit Record Highs
The delinquency rate of office mortgages securitized into commercial mortgage-backed securities (CMBS) spiked to 11.8% in October — the highest ever recorded and more than a full percentage point higher than during the 2008 Financial Crisis, according to Trepp, which tracks and analyzes CMBS performance.
These loans “were good until they suddenly weren’t.”
In October 2022, the office CMBS delinquency rate was just 1.8%. In three years, it has exploded by 10 percentage points.
Flight to Quality and Corporate Downsizing
Older office towers are being crushed by a flight to quality and corporate downsizing.
The long-anticipated return-to-office (RTO) movement has stalled, leaving vacancy rates high. Even newer towers are under stress as companies consolidate office footprints and focus on hybrid models.
For multifamily CMBS, delinquencies have also risen sharply — now at 7.1%, the highest since December 2015.
Multifamily CMBS are backed by apartment property mortgages, where oversupply and softening rent growth are eroding returns.
Newly Delinquent Loans and Maturity Defaults
Loans become delinquent when a borrower fails to make payments or fails to repay upon maturity — a “maturity default.”
A major example: the $304 million mortgage on Bravern Office Commons in Bellevue, WA.
This 750,000-square-foot, two-tower complex completed in 2010 is now vacant, following Microsoft’s 2023 decisionnot to renew its lease. That single event pushed the property into delinquency in October.
Who’s on the Hook for CRE Losses?
For office mortgages, a large share of the exposure lies outside the banking system — dispersed among investors worldwide through CMBS and CLOs held by bond funds, insurers, office REITs, and mortgage REITs.
Private equity and private credit firms also hold significant exposure.
Banks, however, still carry a portion. Many have already written down losses and sold bad loans at discounts to clear their balance sheets.
Even foreign banks — such as Deutsche Bank, which once aggressively expanded into U.S. office lending — have reported substantial losses.
Multifamily Debt: The Largest Exposure
Multifamily remains the largest CRE debt category, with $2.2 trillion in mortgages outstanding at the end of 2024 — about 45% of the $4.8 trillion total CRE debt, per the Mortgage Bankers Association.
Over half of this debt has been securitized through Fannie Mae and Freddie Mac, whose exposure has doubled in the past decade.
Banks and thrifts hold about 29%, life insurers 12%, and private-label CMBS/CDOs/ABS roughly 3%.
State and local governments hold a small remaining share.
The relatively limited exposure of U.S. banks to CRE loans means this downturn is unlikely to become a systemic banking crisis. Most losses are being absorbed by investors and government-backed securities — allowing the Federal Reserve to let the market correct itself.
California’s Hidden Sector: Hard Money Multifamily Loans
In California, a quiet but critical segment of the market is showing stress: 5–14 unit multifamily properties financed by hard money lenders.
There is no centralized delinquency data for this segment because it’s financed by individual investors seeking high returns through private syndicators. Unfortunately, many of these investors don’t fully understand the risks, and syndicators often fail to disclose them.
Throughout 2025, I’ve identified numerous small multifamily properties in foreclosure or default, oscillating between Notice of Default and temporary cure — or what many in the industry now call “Extend and Pretend.”
LLCs, Hard Money, and the Bankruptcy Maze
Compounding the problem:
The multifamily property is typically owned by an LLC.
The hard money lender is also structured within a corporate entity or LLC.
When defaults occur, investors struggle to collect their funds. The managing member often files for Chapter 11 bankruptcy, allowing continued control while foreclosure attempts are stayed by the court.
Resolution usually comes only after the property is sold and proceeds are distributed — a process that can take years.
Meanwhile:
Property taxes accrue with penalties,
Maintenance deteriorates, and
City red tags over permit or habitability violations pile up.
Ultimately, buyers inherit these issues, often hoping for a discounted price that compensates for deferred costs.
“Extend and Pretend”: A Lingering Cycle
This “extend and pretend” era — where lenders and borrowers agree to temporary extensions to avoid recognizing losses — continues to define much of today’s smaller multifamily market.
While some partial portfolio sales offer relief to investors, most remain trapped until liquidation.
Acknowledgment
Special thanks to Wolf Richter of Wolf Street for his exceptional reporting and data insights that contributed to the foundation of this analysis.
www.wolfstreet.com
Final Thoughts
California remains one of the most dynamic real estate markets in the world — and one of the most challenging.
For landlords, tenants, and investors alike, understanding the true relationships between price, rent, and regulation has never been more critical.
📘 For more information on landlord-tenant regulations or to receive a copy of my Renter’s Survival Guide, contact me directly.
Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
🏢 2044 Union Street, San Francisco, CA 94123
DRE# 01452438
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