So much distress. Where are the bargains?

Hi {{first_name | there}},

Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include deal stories, how I'm thinking about risk, lessons I'm learning, and market observations as we oversee our $500MM+ CRE portfolio and serve our 1,100+ investors.

I mention above that topics may include "market observations." Nine issues in, and I haven't shared any.

I want to avoid bland commercial real estate (CRE) market commentary, which can easily turn into a summary of what someone else wrote. Plenty of high-quality, free sources for CRE research are online.

But I can share what research reports can't: what we're seeing each week across the 20 to 30 deals we review and the 10 to 20 high-net-worth investor conversations we're having. 

Here are four things I'm seeing right now:

A surprising number of the high-net-worth investors we speak with have suffered severe or total losses across multiple deals and operators in the past four years. These are intelligent, experienced people.

In many of the cases we've heard about, investors lost 50% to 100% of their invested capital.

Some picked operators that seemed great...at first. Some invested in deals with floating rate debt or aggressive rent growth assumptions. And some were outright defrauded. Unfortunately, there's example after example after example of fraud in CRE.

Meanwhile, if you simply owned the S&P 500 index and reinvested dividends, you're up 80%+ over the last three years. That's unusually strong performance. But it makes the contrast with many recent CRE investments especially stark.

Because of recent experiences, some investors are saying they're done with private CRE investing entirely. Others are still investing, but they are moving more slowly and asking harder questions.

I think the increased skepticism and deeper questions are healthy for the industry. But private real estate fundraising hit a nine-year low in the first half of 2026, according to data published by PERE. 

Ironically, this challenging capital raising environment is happening at a time when we're seeing very compelling investment opportunities.

There's significant distress beneath the surface in multifamily, concentrated in the Sun Belt. We hear about it weekly from operators, investors, and brokers.

Properties are dealing with loan maturity issues, higher debt costs, tenant credit problems, increased insurance rates, soaring property taxes, and stagnant or negative rent growth. Many owners are covering shortfalls out of pocket every month, often to the tune of tens of thousands of dollars.

So why haven't we seen more forced sales and foreclosures? Lenders often have little incentive to force a foreclosure if an extension or modification gives them a better chance of being repaid. So troubled deals can remain alive much longer than you might expect.

At the same time, there is still capital chasing quality multifamily acquisitions.

Multifamily cap rates have risen (prices fallen) since the 2021-22 peak, but the demand has kept bargains scarce. For multifamily and industrial, negative leverage is typical.

Q2 2026 data from Colliers shows multifamily cap rates at ~5.2%. At the same time, pricing was flat year over year despite sector distress and rising borrowing costs.

I'm reading Rockefeller’s biography, and this paragraph from the book reminded me of a period we just lived through:

"It was such a period as seldom occurs, and hardly ever more than once in anyone's lifetime...One had only to buy anything and wait, to sell at a profit; sometimes, as in real estate for instance, at a very large profit in a short time."

That's banker Thomas Mellon describing the years 1863-1873, a period spanning the end of the Civil War and following years.

From roughly 2011 to 2022, CRE felt the same way. Debt was cheap. Rents increased. You could buy almost any property, hold it, and sell for a significant profit in just a few years. People got addicted to it, and some thought it would never end. 

In late 2022, the tide went out, and CRE's easy-money era ended. Since then, we have seen many public examples of operators being exposed as skinny dippers.

What will matter in this current cycle for CRE operators, and really in any cycle:

For example, at one multifamily property we invested in, a new full-time property manager replaced an underperformer in March. Occupancy increased from 92.7% in Q1 to 94.4% in Q2, and NOI finished 4.1% above projections, driven partly by tighter expense control. Sometimes the difference really is as simple as getting the right person in the right seat.

Office is an obvious example. The Decatur, GA submarket where we just invested has roughly 7.6% vacancy, which looks nothing like the national office doom-and-gloom headlines.

We've also all heard something like this in recent years: "There's a housing shortage. Buying a house is unaffordable for many Americans."

Those statements are technically true. The U.S. has a well-documented housing shortage, and multifamily can be a great asset type to invest in. But that logic is incomplete.

For example, one of the most popular places to invest in multifamily in the last cycle was Austin, TX. Both job and population growth were skyrocketing. But as of July 2026, Austin rents are down 3.7% year over year (source), primarily due to increased supply. If there's a housing shortage, why have rents in Austin been going down the last few years?

National office distress does not mean every office submarket has 20% vacancy. A national housing shortage does not mean every metro needs more apartments.

Broad statements like "office is dead" or "multifamily is distressed" aren't useful. We underwrite the building, operator, basis, capital structure, and business plan.

If you have feedback or there's a topic you'd like me to cover in a future newsletter, reply to this email. I read every response!

All the best,

Ben Kahle

Managing Partner | Wellings Capital