There Is No Distress Wave
Why the distressed commercial real estate reckoning everyone is waiting for won't arrive as a wave, and where the durable opportunity actually lies.
Pacific Flyway's perspective from IMN Distressed CRE West · July 15, 2026 · Dana Point, California
Executive Summary
The consensus trade in commercial real estate is patience, wait for a 2009-style flood of forced sellers and buy the wreckage cheap. Pacific Flyway spent a day among roughly 200 lenders, allocators, and servicers at IMN Distressed CRE West, and we left with the opposite conviction: the wave is not coming, and positioning for it is the losing strategy.
This cycle is a refinancing shock, not a demand collapse. The distress is real, but it is being resolved slowly, privately, and through negotiation rather than liquidation, closer to the 1989-1995 RTC-era grind than to the Global Financial Crisis (GFC).
In that environment, the edge does not come from buying cheap at auction. It comes from an authentic investment thesis, a disciplined basis below replacement cost, and genuine operating capability in supply-constrained Western markets. That is precisely the space and investment thesis Pacific Flyway is built to occupy.
The thesis in one line. Distress = loans priced for cheap money, meeting a maturity date, inside a market repriced to expensive money. It clears deal-by-deal, not in a wave, and rewards operators who can tell a broken balance sheet from broken real estate.
1. A Refinancing Shock, Not a Demand Collapse
The defining fact of this cycle is that the buildings are still leased and the tenants still pay.
What broke is the capital structure. A wall of loans underwritten between roughly 2018 and 2021 at ~3-4% interest is maturing into a world of ~6.5-7.5% interest. Simultaneously, values reset lower, not because income collapsed, but because cap rates repriced upward against a ~4% 10-year U.S. Treasury.
A loan that was a comfortable 60% of value at origination can now be 80-100%+ of today's value, and the property's income no longer covers the new debt service. That gap is the distress.
Cap Rate = Risk-Free Rate + Risk Premium − Expected NOI Growth.
All three moved at once this cycle: the risk-free rate rose (10-year UST), the risk premium widened as capital grew scarce, and expected rent growth softened. The result across much of the West has been a 20-30% decline in value, often paired with an operating-expense and insurance shock that deepens the squeeze by compressing Net Operating Income (NOI).
The maturity wall
Hundreds of billions of dollars in CRE loans mature each year through 2027. Many cannot refinance at today's rates and values without a large new equity check to "right-size" the loan. That forced-decision moment, pay down, sell, hand back the keys, or bring in rescue capital, is the engine of opportunity. But the way that decision is being made is nothing like the GFC.
2. Why There Is No Wave: "Stressed" Market, Not "Distressed"
The single most important thing we heard, repeatedly, and from opposite corners of the market and capital stack, was that the anticipated flood of distressed assets has not materialized, and structurally likely will not. The market is stressed, and has been for roughly three years, but genuine forced distress remains a trickle.
Banks won't take the pain. Lenders are well-capitalized and the acute post-2023 pressure has eased. They are willing to move assets, but unwilling to take a discount to do it, preferring extensions, modifications, and fees over realized losses.
Most distress never forecloses. Roughly three-quarters of the 2026 maturity wall is expected to resolve through loan modifications and refinancing. "Extend and pretend", or "delay and pray", remains the dominant posture.
What trades, trades quietly. Institutions in fundraising mode do not want the negative headline of a marked sale, so the distress that does clear moves almost entirely off-market, one relationship at a time through gatekeepers.
The analog is the RTC era, not 2008. The closest historical parallel is the 1989-1995 Resolution Trust Corporation workout of the S&L crisis: a multi-year, grinding, relationship-driven clearing, a slow bleed, not a heart attack.
Two developments could gradually loosen the logjam: Basel III capital rules that push banks toward moving loans (often via repo and loan-on-loan facilities rather than direct sales), and the prospect of Fannie Mae and Freddie Mac beginning to auction non-performing loans. Neither is a dam-break. Both reinforce the same conclusion: this market rewards patience of sourcing, not patience of waiting for a crash.
3. The Capital Picture: Abundant Money, Scarce Equity
The paradox of this market is that capital is everywhere and nowhere at once.
There is an abundance of dry powder chasing deals yet, as one investor put it, when you actually need to write the check, it is not there. Two shifts explain the tension.
Banks stepped back; private credit stepped in
Regulated banks retreated from CRE, and non-bank lenders, debt funds, specialty finance firms, mortgage REITs, and opportunistic capital, filled the gap. They lend faster, take more complex risk, and price higher. Representative terms we heard: construction debt around SOFR + 450-500 bps at 65-85% loan-to-cost, and a notable volume of all-cash transactions in the $15M-$45M range where speed and certainty win.
Preferred equity is the new common equity
With LP equity genuinely scarce and quality assets priced to perfection, the risk-adjusted return on common equity often no longer clears. Capital has responded by moving up the stack: preferred equity and mezzanine "rescue capital" now fill the gap that fresh common equity used to. As one major credit investor framed it, "you do Pref precisely because you don't like the basis of the common equity beneath you." For a disciplined operator, that is a signal, not just a financing detail: the market is telling us where the fair basis really is.
What this means for a sponsor. In a priced-to-perfection market, the winning capital is not the cheapest, it is the best-structured. Whoever controls the fulcrum (the layer of the capital stack where value runs out) controls the deal. Pacific Flyway underwrites to that reality first, and to headline price second.
4. Where the Opportunity Actually Is: Thesis, Basis, Execution
If assets will not be handed over cheaply at auction, then returns cannot come from price alone, and certainly cannot come from financial engineering. The room's clearest consensus was that alpha in this cycle is earned three ways.
Thesis, a specific, authentic reason a deal wins: a thematic bet in a defined location, not a spreadsheet. Pacific Flyway's edge: local conviction in Western infill and supply-constrained submarkets.
Basis, owning below true replacement cost, so new supply can't undercut you. Pacific Flyway's edge: we build, so we know true construction and entitlement cost, not a guess.
Execution, a credible business plan and sponsor who can actually deliver it. Pacific Flyway's edge: hands-on development and operations, not passive allocation.
This is where we separate the two flavors of distress:
Financial distress, a good building with a broken balance sheet. This is the opportunity: recapitalize it and the asset performs.
Physical / fundamental distress, space the market simply no longer wants is a trap, unless a change of use converts it into mixed-use or genuine placemaking. Cheap is not the same as good. And in every case, location and demographics lead the underwriting: people are consumption and demand, and the markets that win are the ones people are moving toward.
5. The Western U.S. Lens
Distress is not uniform across the West. The map that emerged is one of capital in motion, leaving friction, seeking growth and defensible basis.
California: capital in flight from friction.
Office distress is deepest; multifamily strain is about over-leverage more than vacancy.
Regulatory risk is now actively repricing behavior, several major firms said plainly they had turned off the California investment spigot.
Another firm is reallocating Los Angeles funds, with capital diverting toward Thousand Oaks, San Diego, and Oceanside: coastal, supply-constrained, but with less regulatory drag.
Arizona & Nevada: growth meets vintage risk.
Strong in-migration supports demand, but 2021-2022 multifamily bought at peak pricing faces the sharpest recapitalization pressure.
Pacific Northwest: supply that outran demand.
Softer office and urban cores; watch pipelines that overshot absorption.
Mountain West, Utah, Idaho, Montana, Wyoming.
Utah & Idaho: strong in-migration from gateway markets supports demand, but 2021-2022 multifamily and public homebuilders bought at peak pricing face the sharpest recapitalization pressure.
Denver: severe supply and regulatory headwinds across most asset types.
Climate & insurance: an operating-expense line item, not a footnote.
Wildfire, storm, and flood exposure now materially affect both value and finance-ability.
Lenders increasingly require maximum coverage, and premiums are a real drag on NOI.
Secondary & tertiary markets: basis discipline is everything.
Less institutional competition, but thinner exit liquidity.
The margin of safety has to live in the basis.
6. Where Pacific Flyway Stands
At IMN, Pacific Flyway was one of the very few operators in a room full of allocators, and that is exactly the point. The conference was a capital-and-credit gathering: debt funds, allocators, family offices, and servicers dominated, and hands-on developers were a clear minority. In a cycle where execution and basis are the scarce inputs, being an operator is the differentiated position, not the common one.
Pacific Flyway's approach follows directly from everything above:
We know real cost. Because we build and develop, we can judge whether a distressed price is genuinely below replacement cost, an edge over financial buyers who are estimating.
We hunt financial distress. Good assets with broken balance sheets in Western multifamily and retail, and change-of-use / placemaking where the real estate itself must be reimagined.
We are basis-disciplined. A defensible basis below replacement cost is the margin of safety; we do not rely on cap-rate compression or rental-growth assumptions to make a deal work.
We are ready to move. Strong markets with temporary problems, an authentic thesis, and capital positioned to act the moment an off-market opportunity appears.
Our Buy Box. Strong markets with temporary problems · Financial (not fundamental) distress · Basis below replacement cost · A specific, authentic thesis in a defined submarket · Sponsor-led execution · Capital ready to close · Patient.
7. What We're Watching
We track a short list of signals that tell us how the grind is progressing and when the sourcing environment shifts in our favor.
10-Year Treasury (~4.5%), the base cost of all capital. Higher-for-longer keeps pressure on values.
Cap-rate-to-Treasury spread, ~100-150 bps = tight, late-cycle. A widening toward 200+ bps signals real value.
Delinquency & special-servicing rates, rising rates mean the extend-and-pretend dam is under sustained pressure.
Bank vs. non-bank lending share, confirms private credit's role and where structured opportunity sits.
Agency (Fannie / Freddie) loan auctions, a potential new, scaled source of off-market distressed product.
Our read: a slow, multi-year clearing in which values have largely plateaued and opportunity is unlocked by sourcing and structuring, not by waiting for a crash. Like several of the sharpest investors in the room, we are genuinely optimistic about the next three years, for those positioned to act with discipline and who know where to look.
Follow Our Thinking
These are our field notes, a perspective, not an offering. We will keep publishing how we read this cycle and current market as it unfolds, and how Pacific Flyway is positioning within it. If you would like to follow our perspective, learn more about our investment thesis and opportunities, or compare notes on the Western markets, we would welcome the conversation.
Scott Heath, Principal, Pacific Flyway Investments, Inc.
scott@pacificflywayinvestments.com · pacificflywayinvestments.com
Disclaimer. This document is for informational and educational purposes only and reflects the author's opinions and observations as of July 2026, which are subject to change without notice. Market figures are illustrative, drawn in part from conference commentary, and have not been independently verified. Nothing herein is investment, legal, accounting, or tax advice, nor a recommendation, offer, or solicitation to buy or sell any security or interest in any fund, vehicle, or investment. Any prospective investment involves substantial risk, including possible loss of capital; past performance and market analogies are not indicative of future results. Prospective investors should conduct their own independent due diligence and consult their own advisors.