Many investors are watching the distressed real estate market waiting for the moment to buy. That moment isn’t here yet.
But the debt market? That’s a different conversation.
Over $600 billion of multifamily debt matured across 2024 and 2025; the largest two-year concentration on record. Lenders extended roughly $400 billion of those loans over the past several years. Most of them are coming due again. Same assets. Same problems. Higher rates, deflated values, limited options to refinance or sell.
The can has been kicked down the road as far as it will go.
When lenders can’t extend anymore, they have two choices: take the property back or sell the loan at a discount.
Both are happening now. The first camp is foreclosing. Most of these lenders aren’t operators. Those assets will eventually hit the market as REO, and if you’re on any broker lists, you’re already starting to see it trickle through. The second camp is selling loans today at meaningful discounts rather than risk operating a deteriorating asset.
That second camp is where the opportunity is.
Distressed Debt Offers Optionality
Distressed debt; loans discounted below the unpaid principal balance and in default, is trading at 50 to 85 cents on the dollar. At that pricing, discounted notes can generate 7 to 11% current yields, with total return potential in the high teens to low twenties. Loans in the 70 to 85 cent range still give you good real estate underneath them. Bigger discounts mean tougher assets. But tread carefully.
What makes debt different from a direct acquisition is optionality. You can hold the note at a discount and collect income. You can modify terms with the borrower; your lower basis gives you flexibility they can’t get anywhere else. You can foreclose and take the property back at a discounted cost basis. Or you can exit the position as the market recovers. No direct purchase gives you that many ways to win. You’re sitting senior in the capital stack, generating current income, with multiple exits available.
From a portfolio standpoint, it complements direct real estate well. Core real estate is generating mid-to-high single-digit yields with tax efficiency. Debt is generating low double digits with hard collateral underneath it. Together they produce a higher blended yield without leaving the world of real estate.
Look at the GFC for the reference point. Peak pricing in 2005. Best direct buying in 2011 and 2012. Roughly a seven-year lag. This cycle peaked in 2022. That puts the best direct acquisition window somewhere around 2029.
The deals that got bought in 2021 and 2022 at peak pricing, the ones with floating rate debt at 60, 70, 80% LTV, are not coming back. Those cap rates are not going back to three. Those interest rates are not going back to zero. And the operators who have been feeding bad projects, putting good money after bad, are starting to recognize it. You’re going to see a lot of those deals fold in 2026 and into 2027. That’s not speculation. The math doesn’t work and there’s no version of the future where it does.
We’re in the second or third inning of this reset. A lot of equity has already been wiped out. A lot of debt still needs to be.
Bottom Line
Between now and the direct acquisition window, distressed debt is one of the better ways to stay productive.
The yield is real. The collateral is hard. And you’re buying into a position where time works in your favor, not against you.
That’s why until at least 2029; distressed debt is the smart trade.