- Borrowers who cannot refinance into permanent debt are replacing one bridge loan with another, and $31.6B of them went into CRE CLOs through August, already above all of 2025, per Fitch.
- Fitch says modified loans in its rated deals are up 68.6% since late 2025 to nearly $4B, which helps explain why seriously delinquent loans sit at just 0.52%.
- MSCI’s Jim Costello told Bisnow that abundant debt and office distress that calls for repositioning, not refinancing, make a near-term reckoning unlikely without a rate spike or credit crunch.
Owners who cannot refinance into permanent debt are swapping one floating-rate loan for another, and bridge-to-bridge loans are the vehicle, Bisnow reports.
The wager is that long-term rates fall before lenders stop going along. MSCI’s Jim Costello described the move to Bisnow as a high-priced gamble, and so far the rate market is working against it.
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Rates Moved the Wrong Way
These owners underwrote their exits around cheap long-term money. The 10-year Treasury averaged 1.45% in 2021, and with the Fed’s policy rate near zero, a later refinancing looked easy.
That assumption broke once the Fed began hiking in 2022, and for the next two years lenders mostly chose extensions over forced sales. Rate cuts across 2024 and 2025 did not bring long-term yields down.
The 10-year has gained more than a full percentage point this year. It touched 5.31% on Monday, its highest in over two decades, after the Fed’s September hike, its first since 2023.
CLO Volume Keeps Climbing
Capital is still available. Fitch counted $31.6B of bridge loans packaged into CRE CLOs through August, which already tops 2025’s full-year total and puts 2026 on track to be the biggest year for that issuance since 2021.
The collateral is weakening, though. Fitch reviewed 65 actively managed CLOs it rates and found that performing, stabilized loans are being repaid and swapped for riskier ones with greater expected losses.
Reported performance still looks clean because of loan rewrites. Serious delinquencies in the CLOs Fitch rates stood at just 0.52% in July, compared with 1.44% in March, yet modifications have climbed 68.6% from the end of 2025, to almost $4B. Many of those changes simply give borrowers more time.
Why Lenders Keep Funding the Strategy
Costello told Bisnow the motive is simple economics: a lender that refinances a competitor’s 2021 loan earns a good spread.
Debt funds, many of them spun out of private equity real estate shops, approach default differently from the way banks do. In Costello’s telling, a fund that lends against a marked-down valuation can treat default as part of the plan, and ending up with the keys to a good building is an acceptable result. A bank loan officer would rather not manage property.
Those lenders are gaining ground. Their slice of commercial property lending, a group that includes debt funds, grew from 13% to 16% by the first half of 2026, MSCI figures cited by GlobeSt show. They also run the highest average loan-to-value ratio MSCI tracks among lender groups, at 69.5%.
A Different Downturn From 2008
Plentiful debt is a main reason this cycle looks unlike the last one. MSCI data show distressed deals were one in five commercial property trades at the end of 2010, versus about 3% as of mid-2025. Costello told Bisnow credit was simply unavailable in the 2008 crisis, which is not the case today.
The stress is also a different kind. Much of it sits in older office buildings whose problem is obsolescence, not financing. Costello pointed to an older Midtown Manhattan office building as the kind of asset no lender wants to take back.
Why It Matters
Lenders disagree on timing. Joe Bachkosky, head of special situations at Rialto Capital, told attendees at Bisnow’s commercial real estate finance conference in New York last week that forced selling has been limited so far but becomes more likely the longer rates stay high.
Costello is less alarmed. He told Bisnow he sees two ways the issue could be forced: long-term rates spiking, or lenders abruptly pulling back from the loans that are holding these deals together.
The strain already shows elsewhere, as refi deals struggle without fresh equity.
What’s Next
Costello told Bisnow a Fed rate cut would not rescue these borrowers, because long-term rates track inflation and bond-market demand rather than the policy rate.
Bisnow also cited Apollo’s chief economist, Torsten Slok, who argued this week that yields could top out in roughly a month if a Middle East settlement looks more likely and pushes oil lower before the U.S. midterms.
If rates ease, the bet pays off. If they do not, owners on a second bridge loan will eventually face their lenders and investors, though Costello said hard decisions are unlikely until someone forces them.
