Early speaker responses to pressing questions in distressed CRE

1. Distressed CRE 2026: What can we expect? Given the current market uncertainty, it's difficult to pinpoint. However, pressure is growing in the system which should create many buying opportunities in 2025 and 2026.
2. How are you balancing the short-term challenges and long-term strategies when effectively asset managing one of your distressed properties? The key is to continually assess the value of the asset to ensure that good money is not being thrown after an investment that is too far gone.
3. For your distressed office buildings why would you stand pat, do a light value add or convert to residential? Fortunately, we do not have any distressed office buildings in our portfolio. However, creativity is likely a requirement to salvage the value from these distressed assets. Conversion to residential is being discussed a lot, but the realities of the costs associated make it a less attractive opportunity.
4. Baseball season is starting… How is your team looking? Better since the invention of the torpedo bats. Hopefully, the Yankees are still in first place by the time of the conference.

Distressed CRE 2026: What can we expect?

In 2026, a wave of distress is expected in commercial real estate due to nearly $1.8 trillion in loan maturities, persistent high financing costs, and tightening lender flexibility. Political uncertainty, global conflicts and potential U.S. policy changes will likely delay investment decisions and exacerbate market instability. Soaring insurance premiums are eroding NOI and pressuring owners. The office sector remains structurally challenged, with high vacancy rates and limited conversion feasibility, positioning it as a major source of distress. While pricing gaps are narrowing, distress-driven sales may present strategic buying opportunities for well-capitalized investors.

Tell us about the last distressed opportunity you looked at? What were the key takeaways from that experience?

One of the most recent distressed opportunities we pursued was a note acquisition on two defaulted construction loans for the Tryp by Wyndham and La Quinta by Wyndham in Orlando’s International Drive submarket. The sponsor had defaulted, and the loans had accrued interest and a history of litigation. We acquired the loans at a deep discount to replacement cost—roughly $84k per key versus a construction basis of $226k per key—giving us significant downside protection. The key takeaway was the importance of optional paths to value creation, including loan modification or foreclosure. Buying the note gave us control without initially having to own the real estate, allowing us to stay flexible based on the sponsor's willingness to cooperate.

How are you balancing the short-term challenges and long-term strategies when effectively asset managing one of your distressed properties?

With the Tryp and La Quinta opportunity, the short-term challenge was navigating an ongoing default situation and understanding the sponsor’s financial and operational posture. Litigation history also presented complexity. Our approach was to focus on preserving optionality—working toward a loan modification if feasible, but being fully prepared to foreclose and reposition the assets if not. Long term, these are high-quality assets in a demand-rich, globally recognized tourism corridor with strong fundamentals, especially with Universal’s Epic Universe set to open in 2025. So, we anchor our short-term actions to that long-term thesis: control the asset, stabilize it operationally, and prepare to benefit from the massive demand coming into the submarket.

Are there any distressed opportunities in any niche asset class that you are or have looked at?

Yes—select-service hotels in strong leisure-driven markets are one of the niche asset classes we’re actively focused on. This Tryp/La Quinta deal is a perfect example. These were brand-new builds that came online around the pandemic and struggled with ramp-up and capital structure issues. We believe the select-service segment is attractive because it combines lower operating costs with strong demand recovery in drive-to and experiential leisure markets. The inefficiencies in the capital stack for new builds during COVID created distressed loan sale opportunities that we can underwrite and act on quickly.

How did you finance a recent distressed transaction?

For the Tryp and La Quinta transaction, we pursued note-on-note financing—a $12.5 million senior loan, secured by our interest in the defaulted notes. The financing was structured at a conservative 32.5% LTV, based on our view of stabilized asset value and our discounted purchase basis. This capital structure allows us to minimize equity risk while maintaining strong control rights and upside through loan resolution or ownership transition. It’s an efficient and flexible way to unlock value in distressed situations without overleveraging the investment.

For your distressed office buildings why would you stand pat, do a light value add or convert to residential

Fortunately, we do not own any office buildings, but we are closely monitoring the current dynamics of the office market, especially given the challenges the sector has faced in recent years. After a tough period, with Covid-related disruptions, the shift to remote work, and rising inflation and interest rates, it appears that the market may have reached its bottom, particularly for Class A and A+ properties in prime locations. With return-to-office policies gaining traction and absorption rates turning positive, we’re starting to see some signs of recovery, which is encouraging for the overall outlook for high-quality office buildings in top metros. We are mindful that a significant portion of the office market, particularly older or less prime properties, still faces substantial challenges. Distressed sales have become more common, and prices are down as a result of rising special servicing rates. Lenders and investors are increasingly dealing with troubled loans and short sales, which could present both risks and opportunities. We remain cautiously optimistic as we believe the market will gradually stabilize. Our focus is on staying flexible and responsive to evolving trends, whether that involves supporting ongoing investment strategies or exploring opportunities to reposition distressed assets. The potential for converting older, underperforming office properties into alternative uses—like residential or mixed-use—could also present attractive opportunities in markets where demand is strong.

Baseball season is starting… How is your team looking?

We’re based in Atlanta, so we follow the Braves closely. While I expect them to do well this year, as I write this, they’re 0-6. It feels like we’ve hit bottom, much like the office market, and there’s potential for a rebound ahead.

1. Distressed CRE 2026: What can we expect? We can expect to see more distress in the commercial real estate ("CRE") market, which will be caused by several factors including (w) higher interest rates will remain for a longer period of time than many hoped, so those CRE owners hoping for lower interest rates will need to transact, (x) with tariffs being raised on so many products, such pricing pressure will cause inflation to increase thereby taxing already thin operating margins for many CRE assets, (y) although a subset of inflation, the cost of property / flood / fire insurance will continue to increase as faster-than-inflation rates, placing additional stress on property owner's budgets, and (z) the number and magnitude of changes being imposed by Washington, D.C. will increase uncertainty in the marketplace which (when combined with other elements) will likely result in a recession in 2025 that will further strain the net margins of CRE.
2. Tell us about the last distressed opportunity you looked at? What were the key takeaways from that experience? The last distressed opportunity I reviewed was a multi-family asset in the Bay Area. The asset was constructed using all equity, but when the building was finished the owners wanted to repatriate some dollars out of the investment, so they sought a loan. After reviewing the asset's financials, we were able to offer a loan for less than 50% of their costs, in that (a) they overbuilt the asset such that top-of-market rents in that area could not generate sufficient net cash to service a larger loan on the property, (b) the building started construction when rent prices were still increasing, but with the flatlining of rents across most markets the presumed increased rent cash flow did not materialize, and (c) insurance and staffing costs were materially greater than the property owner team estimated when they underwrote the construction of the building. The mix of lower sale/financing value of the property, flatlining rent market, and increased costs made the project unprofitable from a capital-investment perspective.
3. How are you balancing the short-term challenges and long-term strategies when effectively asset managing one of your distressed properties? 3650 is primarily a lender whose goal is merely to be repaid. With that in mind and given the context that foreclosing on and operating an asset it expensive in terms of financial and human capital, we take a long-term view to determine if working with the borrower to extent the loan / forbearance period will materially increase the likelihood of 3650 being repaid without having to incur the costs of exercising remedies. Thus, we can look at having elements of a loan's repayment be made into PIK obligations or defer the funding of some types of standard reserves if we think that such flexibility will lead to long-term stabilization of the property. That said, there are assets for which waiting to exercise remedies will not make a material difference, in which cases we exercise remedies very quickly.
4. Are there any distressed opportunities in any niche asset class that you are or have looked at? 3650 reviews most asset types for financing, but in terms of interesting niches we have seen a number of cold-storage-CRE opportunities that seemed very interesting, given the general lack of cold-storage space.
5. For your distressed office buildings why would you stand pat, do a light value add or convert to residential? Converting to residential only work for approximately 25% of office buildings, due to a range of factors from floorplans to water-pumping/storage capacity to parking density. For those who own Class A office buildings in desirable neighborhoods, generally standing pat should work fine over the intermediate term given increased office-leasing activity. For office properties that are subject to material debt (e.g., CMBS), interesting investment/repositioning opportunities are available, including working with the existing lender to contribute additional equity that is made senior to most of the existing debt and provides for a healthy return (plus a kicker) at a last-dollar exposure that seems well protected in today's CRE marketplace.
6. How did you finance a recent distressed transaction? 3650 is a lender and we generally don't finance foreclosed on CRE, so I don't have feedback to this question.
7. Baseball season is starting… How is your team looking? The Dodgers look like world champions this year!

1. Distressed CRE 2026: What can we expect? Distress will continue and office properties will face the most significant challenges. Banks will have to face pending foreclosures or loan sales and can no longer kick the can on maturities. Increased surveillance of cash flow and deeper analysis of financial reporting will be necessary to potentially detect or deter misappropriation of funds and fraud.

1. Distressed CRE 2026: What can we expect?

Bid/Ask spread getting closer, so more trades.

2. Tell us about the last distressed opportunity you looked at? What were the key takeaways from that experience?"

Rent Stabilized multifamily in NYC. Don’t lend before they change the rules.

3. How are you balancing the short-term challenges and long-term strategies when effectively asset managing one of your distressed properties?

Working through immediate delinquencies and implementing viable long-term solutions.

4. Are there any distressed opportunities in any niche asset class that you are or have looked at?

Across the board.

5. For your distressed office buildings why would you stand pat, do a light value add or convert to residential?

Floor plates and location.

6. How did you finance a recent distressed transaction?

Higher leverage.

7. Baseball season is starting… How is your team looking?

Good.

1. Distressed CRE 2026: What can we expect? Hard to say, but mixed signals. Markets have generally re-emerged, incl marginally lower interest rates, but recent trends in the US administration create uncertainty in all, incl transaction volume and pricing. “Pencils down” for most institutional investors in US assets. Less so in international markets.
2. Tell us about the last distressed opportunity you looked at? What were the key takeaways from that experience?" Pricing is falling in line, but still doesn't "pencil" in most instances. Sometimes, cheap isn't cheap enough...
3. How are you balancing the short-term challenges and long-term strategies when effectively asset managing one of your distressed properties? Survive thru 2025. Aggressively manage vacancies and solve for debt maturities. Assess the prospect for future returns to determine best paths forward, as you’re able. In some cases, it may require undesirable outcomes with existing lenders.
4. Are there any distressed opportunities in any niche asset class that you are or have looked at? Distress is a factor in most every asset class - it largely manifests thru impending debt maturities and the need to pay down principal balances to renew with existing lenders as a function of new valuations and DSCR
5. For your distressed office buildings why would you stand pat, do a light value add or convert to residential? Each case begs a different profile depending on price, layout, zoning, location, etc. As well as the current predicament with existing leases and potential tenant appetite, at current market rents and terms. Residential conversion of a traditional office bldg is not a slam dunk and oftentimes employs a different desired floor layout with shallower depths, more windows and hallway circulation. It also requires more vertical penetrations for plumbing, sewage, electricity, venting, etc, which are generally not easy to add to an existing office layout that generally lack these features. Not to mention rezoning challenges, incl time, risk and expense. Bottom line, while it’s a nice idea, these conversions generally don’t “pencil”, in lieu of potential longer term recovery in the office/retail market.
6. How did you finance a recent distressed transaction? Many are all cash, although debt is still available at lower leverage and higher (possibly dilutive) interest rates. Depends on part on basis, tenancy, location and property type. Not all deals are created equal…
7. Baseball season is starting… How is your team looking? Hope springs eternal… Opening Day is Friday. Tough to beat the best team that money can buy tho (Boo Dodgers!) 🤞