Commercial Real Estate: 2026 Trends and Predictions | Practical Law The Journal

The commercial real estate landscape entering 2026 bears little resemblance to the market of just two years ago. What began as a correction has evolved into a fundamental restructuring of how deals are financed, documented, and executed. The confluence of persistent capital constraints, climate-driven insurance volatility, regulatory acceleration, and technological disruption has created an environment where traditional approaches to transactions increasingly fail to address the realities practitioners face daily.

Looking ahead, stakeholders can expect continued market evolution driven by technological advancements, climate imperatives, and changing legal frameworks. These forces are reshaping commercial real estate legal practice across diverse areas, from capital markets and development to leasing and land use.

Legal professionals must understand not only what is changing but what they must do differently to protect their clients and close deals in this transformed market. Basic assumptions — about risk allocation, deal structure, and even the timeline of real estate development — are shifting. Practitioners must be able to integrate traditional transactional skills with new tools, anticipate regulatory shifts, and structure deals that acknowledge uncertainty while preserving the ability to execute when opportunities arise.

Against this backdrop, Jill Blumberg of Practical Law asked leading real estate practitioners to share their views on the state of the US commercial real estate market, including:

Matthew Dulak

Even as the maturity wall of 2024 eases, a steady flow of loans is likely to enter workout mode over the next 12 to 18 months. That means lots of amend-and-extend conversations, mezzanine loan UCC foreclosures when value is tight, and, in some cases, borrowers handing keys back to lenders to escape carry guaranty liability. Loan extensions will continue to focus on increased reserves, tighter cash management, and partial paydowns.

Office-to-residential conversions will continue to make headlines and are expected to pick up in volume. This is especially true in New York City, with the “City of Yes” zoning changes allowing many more non-residential buildings to convert, as well as affordable housing from commercial conversions under the Real Property Tax Law Section 467-m property tax exemption program accelerating overall housing production.

Insurance costs are continuing to rise (largely due to climate risk), with premiums and deductible pricing being hyper-localized. As a result, insurability is increasingly a core component of deal underwriting.

(For a collection of resources to assist counsel in understanding commercial real estate loan workouts and foreclosures, see Commercial Real Estate Loan Workout, Forbearance, and Deed in Lieu of Foreclosure Toolkit (National and Select States) on Practical Law.)

Jennifer Chavez

Several major forces are shaping commercial real estate, including:

Andrew Lance

Legal implications will stem from:

Kathleen Wu

The next 18 months in US commercial real estate will be defined by three primary legal shifts:

While each shift is significant, the disparity between maturing loan balances and available 2026 capital is the true catalyst for the most aggressive changes in deal documentation.

We have moved past the simple amend-and-extend era. Currently, credit agreements focus on mandated deleveraging through equity-injection clauses, which require sponsors to provide fresh capital as a condition for any modification. To prevent strategic defaults, we are increasingly “weaponizing” non-recourse carve-out guaranties. These “bad boy” provisions now include triggers that convert the entire debt into a full-recourse liability if a borrower attempts to block foreclosure through obstructive litigation.

Further, the scarcity of capital has fundamentally flipped the traditional equity waterfall. Documentation routinely subordinates the developer’s promote or profit share behind preferred tranches that demand priority catch-up returns. We have also replaced slow annual appraisals with quarterly mark-to-market valuation covenants, allowing lenders to trigger near-real-time cash sweeps or margin calls. In this environment, the legal framework has shifted from supporting entrepreneurial growth to a rigid, enforcement-heavy model centered on lender capital preservation.

Matthew Dulak

Sponsors are increasingly pre-wiring refinancing or extension terms into joint venture (JV) documents so that they can execute workouts cleanly and without investor-induced delays. Where that is not possible or where a sponsor seeks to modify a loan on terms that differ from pre-approved criteria, deadlock mechanisms become critical, including, for example, escalation to principals, forced sale, or buy/sell provisions.

(For a model forced sale clause, with explanatory notes and drafting and negotiating tips, see Forced Sale Clause (90/10 Real Estate Joint Venture Agreement) on Practical Law; for a model buy/sell provision, with explanatory notes and drafting and negotiating tips, see Buy/Sell Provision in a 90/10 Real Estate Joint Venture on Practical Law.)

Jennifer Chavez

I do not really see any big changes in deal structuring, but there is usually a significant discussion about who bears entitlement risk and long escrows as needed to secure discretionary entitlements for development projects.

Kathleen Wu

In the 2026 JV landscape, the clear winner in documentation trends is flexibility. However, this does not imply a lack of structure. Instead, we are seeing a sophisticated “triad model,” where adaptive mechanisms are primary, reinforced by surgical controls and dynamic reserves.

The most significant change is the shift away from static, multi-year business plans toward documentation that expects the unexpected. Modern agreements favor trigger-based reviews. For example, if a market metric shifts, such as an interest rate spike or a supply chain delay, the plan enters a mandated review phase. This allows partners to pivot without the friction of a full re-negotiation. Further, sophisticated exit provisions such as “Russian roulette” or put/call options are now standard ways to resolve disagreements quickly rather than emergency last resorts (for more information, see Buy-Sell Agreement (Russian Roulette): LLCs on Practical Law).

While flexibility is the goal, controls have become more targeted. Instead of blanket consent for every move, modern documents use enhanced major decision lists that identify material adverse changes as triggers for intervention. We are also seeing temporary governance committees that only activate during downturns to facilitate rapid responses.

The traditional “rainy day fund” has also evolved into dynamic reserves. Rather than holding idle cash, JVs use floating requirements that adjust based on performance. Capital might be held during high-volatility phases and released once specific milestones are met.

Ultimately, successful 2026 deals will treat uncertainty as a constant. By prioritizing flexibility through adaptive business plans and discretionary capital calls, while backing them with surgical controls, JV partners can move faster and with greater confidence.

Jennifer Chavez

Community opposition continues to be the biggest risk to development schedules. The California legislature has passed several statutes that allow for by-right development of a variety of residential, behavioral health, and other worthy project types. These are intended to streamline development and eliminate the risks associated with NIMBY (Not in My Backyard) opposition, but the rules are complicated and nuanced, and committed opposition can still succeed in challenging whether a project qualifies for an exemption. Even when the law seems clear, this kind of opposition can slow down the approval process because the local agencies issuing approvals and developers must respond to and defend claims, and in the end, there may still be litigation over the decision, which will almost always result in delay.

Anything in California that requires substantive environmental review, such as an environmental impact report or negative declaration, takes months or even years to process, and no method of preparation eliminates legal risk. Best-in-class counsel look carefully for ways to limit California Environmental Quality Act (CEQA) risk by evaluating whether a project can tier from or otherwise take advantage of a prior CEQA analysis. Where environmental analysis cannot be avoided, care is taken to put together a good team of experts and consultants to prepare sound analyses and assist with community engagement to minimize opposition. Land development is a team sport.

Kathleen Wu

The capital stack in commercial real estate has undergone a genuine structural shift. Senior loan-to-value ratios have compressed to around 50%, with private credit funds increasingly displacing regulated banks as originators. Mezzanine debt and preferred equity have moved from optional enhancements to necessary components of most deals, and JV equity partners are largely insisting on structured preferred positions rather than common equity — a clear signal of how the market is pricing downside risk.

Underwriting has shifted from debt service coverage ratios (DSCRs) to debt yield as the controlling metric, with office assets commonly requiring yields above 9%. Quarterly mark-to-market valuations have replaced annual appraisals, which means valuation triggers function more like margin calls. Sponsors are pushing back hard against appraisal mechanics and the consequences that flow automatically from lender-ordered valuations, particularly when the lender’s downside case assumes flat net operating income and meaningful cap rate expansion.

Control rights have become a major negotiation point, with lenders seeking veto authority over leasing and capital expenditure decisions well before any default. Non-recourse carve-outs have expanded significantly, the most contentious addition being litigation triggers that convert loans to full recourse if borrowers contest foreclosure. Hard lockboxes from day one, with cash swept into reserves until debt yield thresholds are met, have become standard and are often as important to negotiate as the rate itself.

Matthew Dulak

Many of our clients have been assembling capital stacks with significantly lower senior loan leverage than two years ago, with mezzanine loans and preferred equity filling gaps to the 70% to 80% cost-to-value range. It has become more common for preferred equity providers to negotiate intercreditor agreements or side letters up front with senior lenders and for mezzanine loan intercreditor agreements to be more sale ready than in the past. The latter is true because mezzanine loan foreclosures became a frequently deployed remedy in recent years.

We are seeing more senior loans sized on the basis of debt yield (which ignores interest rates and amortization) as opposed to DSCR, with prebaked earnouts and hardwired tenant improvement, leasing commission, and capital expenditure reserves across the board.

(For a collection of resources to assist counsel in handling mezzanine loan transactions, see Mezzanine Loan Toolkit on Practical Law; for an analysis of the primary differences in the legal structure, transaction terms, and default remedies of mezzanine loans and preferred equity investments for real estate transactions, see Mezzanine Loan and Preferred Equity Comparison Chart on Practical Law.)

Kathleen Wu

On interest rate risk, floating rate loans universally require SOFR (Secured Overnight Financing Rate) caps, with cap escrow accounts bridging the affordability gap. Extensions are conditioned on hedge tests that require demonstrated DSCR coverage, and the work-around that is actually gaining traction is a partial principal paydown to reduce the notional hedge amount enough to satisfy the covenant.

Matthew Dulak

Many borrowers are swapping a portion (but not all) of SOFR debt to fixed, leaving the rest floating to preserve prepayment flexibility. In general, interest rate cap premiums are down from 2024 and 2025 highs, with many borrowers re-striking and extending existing hedges.

Andrew Lance

Reliance on representations and warranties insurance (RWI) continues to be more present in real estate transactions. RWI can help facilitate transactions. Transactional attorneys need to be versed in the details of how these policies operate to resolve potentially contentious areas and the impact on negotiating terms of PSAs.

Jennifer Chavez

We often see closing conditions requiring receipt of discretionary entitlements, and sometimes even ministerial approvals, for a development project.

Matthew Dulak

The biggest shift in PSA risk allocation in recent years has been increased use of RWI, particularly in entity deals and higher-value single-asset deals. One broker that I work with regularly has seen real estate deal RWI policies quadruple since 2024. They are especially popular in competitive auction processes where the seller has leverage to negotiate for a clean exit and buyers are willing to propose (and pay for) RWI to sweeten their bids. I expect to see continued growth in 2026 and 2027 as insurers continue to customize their policy forms for real estate transactions.

Jennifer Chavez

In my practice, entitlement contingencies in development deals have become the most contentious. This includes negotiations over:

(For model clauses to assist counsel in drafting and negotiating zoning contingencies, with explanatory notes and drafting and negotiating tips, see Zoning Contingency (Commercial Real Estate Purchase and Sale) (Pro-Seller) and Zoning Contingency (Commercial Real Estate Purchase and Sale) (Pro-Purchaser) on Practical Law.)

Bradley Kaufman

In this rather disconcerting leasing environment, I am finding that following the standard negotiation of business terms (location, term, rent, escalations, build-out or construction, allowances, and utilities), the most critical issue being negotiated aggressively is flexibility of both terms and space. Tenants, unsure of future growth plans and aware of constantly changing space needs, seek rights to:

Of course, the landlord’s greatest concerns are tied to what its lender will think of these various options and rights when valuing the premises.

Andrew Lance

Apart from economic and business terms (such as options, which are unique to each negotiation and will always be the most important features), landlords’ lenders, particularly loan servicers, are weighing in, through review of the lease or, in particular, the subordination, non-disturbance, and attornment agreement, to question, change, or supersede resolutions reached by the landlord and tenant in the lease. This review often discounts market practices and business realities in favor of prioritizing narrow and remote concerns. Astute owners engage early with their lenders and servicers to mitigate roadblocks and the possible need to re-trade with their tenants, and astute tenants push for transparency about these communications.

Bradley Kaufman

I think the most expensive silent issue in lease negotiations is the build-out free rent period. The worst position for a tenant to be in at lease commencement is to be months behind in their build-out and ability to use that space, while having run through or fully expended their construction allowance (less perhaps a minor 10% landlord holdback toward completion of the tenant’s work). The best way for a tenant to avoid this (though sometimes it is realistically unavoidable from a financial negotiation standpoint) is for the tenant’s design and construction team to work diligently with their team of outside consultants (contractor, architect, expeditor, and land use and zoning counsel) to get the most accurate picture of the scope and timing for the tenant’s build-out. It is up to counsel to coordinate these efforts and ensure in all drafts that the process does not get ahead of itself.

Additionally, considering the current contentious political climate, tenants’ counsel should make sure that the force majeure provision includes disorderly conduct (public or private), in addition to strikes and government actions.

Andrew Lance

SLBs are very active as a financing tool. They work well in acquisitions and non-acquisition financings of operating businesses with stable cash flow and a large real estate footprint. However, we also have used SLB structures successfully even with one-off development projects at or near completion and with single asset financings. The all-in cost can be competitive, and we regularly structure SLBs that are effective contemporaneously with acquisitions to reduce the required capital commitment and transaction costs, and to shift risk from the acquirer.

We also see a lot of ground leasing activity, which is an alternative route to achieve the same goal of lowering the amount of capital needed to execute. This is most effective in projects involving development or repositioning, although we also see transactions regularly where the ground lease is a means to create tranches of risk and facilitate separate financings at each ownership and tenancy level.

Preferred equity remains an important and active tool, but not necessarily more so than in the past. It is not usually a foundational building block of the capital stack.

(For more on key issues in SLB transactions, see Key Leasing Issues in Sale-Leaseback Transactions on Practical Law; for a collection of resources to assist counsel in effectively drafting and negotiating ground leases, see Ground Leasing Toolkit (National and Select States) on Practical Law.)

Matthew Dulak

The most critical gating item in US data center transactions is power and interconnection. Potential buyers should request and carefully review all interconnection applications, study reports, and approval letters, as well as evidence that the seller’s queue position is assignable. PSAs include heavily negotiated pre-closing power milestones (for example, Seller will deliver [__] MW by [Date A], and [___] MW by [Date B]), with buyers typically receiving purchase price credits or a right to walk away if deadlines are missed after negotiated cure periods.

Another critical piece of power-related diligence is what site upgrades will be necessary to achieve full energization (such as new substations, feeders, transformers, and switchgear) and who will be required to fund them.

Kathleen Wu

At the federal level, two big changes will impact real estate deals and development costs directly:

At the state and local level, two developments have the most potential to affect commercial real estate:

Andrew Lance

Counsel should monitor housing-related developments. Housing is a pervasive and critical need, not merely a regulatory focus, and it is in the mix for every significant development project.

Kathleen Wu

Climate risk and insurance costs are fundamentally reshaping how commercial real estate deals get done in 2026. Insurance has become a deal-breaker. Buyers face unexpected challenges in closing deals due to a shortage of insurance availability and skyrocketing premiums, especially in areas with increasing exposure to climate risk. In some Florida coastal areas, insurance is not available at any price, which kills transactions outright.

The financial pressure is real. Average insurance costs for commercial properties nearly doubled over the past decade, from $1,558 per building per month in 2013 to $2,726 by the end of 2023. Projections show this could reach $4,890 per month by 2030. Consequently, lenders are wary. Banks are increasingly concerned about climate-related risks and associated insurance costs, leading to more cautious lending practices, such as reduced loan-to-value ratios or the rejection of financing for high-risk properties. Lenders are demanding detailed climate risk assessments during due diligence, not just checking historical flood maps.

Smart buyers verify insurance availability before making an offer, not after signing the contract. Once a box-checking exercise, securing insurance has become a complex and prominent part of the deal consideration process.

Purchase agreements increasingly include insurance cost caps that let buyers walk away if premiums exceed certain thresholds. Some states, like Hawaii, require climate risk disclosures in seller statements, while California’s SB 261 requires posting of climate-related financial risk disclosures. (Enforcement of SB 261 is currently paused, but companies may post reports voluntarily.)

The bottom line is that climate risk is not a future concern. It is affecting valuations, deal timelines, and whether transactions close at all right now.

Andrew Lance

Provisions for equitable adjustment for new tariffs have become fairly common in contracts where goods depend on offshore materials and where that dependence has been disclosed. I am not seeing provisions to address labor shortages or supply chain issues. Established contractors are on top of their game in dealing with these challenges and are able to provide time and cost commitments.

Jennifer Chavez

The biggest hurdles are probably not legal ones. There are several California laws that encourage the conversion of office space to more productive use. Even if discretionary approvals are required, decision-makers are generally open to the creation of more housing and mixed-use developments. However, conversions contemplating adaptive reuse of an existing building are usually not a good option because traditional office floor plates do not work well for residential or other types of land uses. The life-safety code upgrades required to convert an office building to residential use can also make a project cost prohibitive.

Another common hurdle is the effect of private covenants. An office building may be subject to covenants, conditions, and restrictions (CC&Rs) or a reciprocal easement agreement (REA), the terms of which make it infeasible to convert without obtaining the consent of other property owners, which is often difficult to secure. Private covenants may contain use restrictions prohibiting residential use or require shared parking or utilities that makes redevelopment for another use impractical without the support of other property owners willing to amend these covenants. California recently adopted AB 1050 to provide a path forward for projects proposing residential development on property subject to covenants that prohibit residential land use, but even this requires county counsel action, which may be difficult to obtain.

Matthew Dulak

Conversions are definitely viable in 2026, especially in cities like New York that have relaxed restrictions and expanded eligibility in recent years. Beyond entitlements, other legal hurdles include the existing structure’s compliance with the building code for residential apartments (regarding light and air, egress, and unit layouts) and whether or not residential uses are permitted under existing REAs and ground leases.

Jennifer Chavez

It really depends. Some sellers are willing to accept closing conditions that require receipt of entitlements and private covenant negotiations to be successfully handled prior to closing. Buyers may have to risk entitlement and other pursuit dollars, but they can recover deposits if they ultimately are not successful. Some sellers will only give a buyer time to pursue entitlements and neighborly cooperation required for development, but pursuit costs and deposits will be at the buyer’s risk. Some sellers will agree to secure entitlements and neighborly cooperation at its cost and as a condition to closing. This is a buyer-favorable approach, provided the buyer has appropriate review rights and controls on project design and conditions of approval that could significantly impact the project it will ultimately have the right to construct.

Kathleen Wu

AI is transforming the commercial real estate legal landscape by accelerating contract analysis, due diligence, and dispute resolution, tasks that have traditionally been time and labor intensive. AI systems can read large volumes of leases, loan documents, CC&Rs, and diligence materials word for word to extract key provisions, compare documents for inconsistencies, summarize complex agreements, and construct timelines of critical events. In disputes, AI can quickly synthesize pleadings, correspondence, and transactional history to help attorneys assess risk, identify leverage points, and get up to speed faster. The result is greater efficiency, consistency, and insight across transactions and conflicts, allowing attorneys to focus more on strategy, negotiation, and client counseling than on manual document review.

Despite the benefits of AI in commercial real estate transactions, attorneys must understand that:

Every practitioner’s goal should be to successfully combine AI-driven analysis with experienced legal judgment to deliver faster, higher-value outcomes for commercial real estate clients.

Matthew Dulak

Our junior associates have found great success in using AI programs to prepare first drafts of documents like closing checklists, term sheets, estoppel forms, and lease abstracts. It is also quite useful for comparing markups to initial drafts and creating issues lists. While still not a substitute for real research and source checking, AI is a great tool for framing issues and providing leads for primary and secondary sources.

Andrew Lance

While there is a spectrum of views about the anticipated impact of AI, the short-term benefit is not as transformative as the promise of the technology over a longer time frame. There is extensive learning to be done, not only by the various products themselves but also by the users (attorneys, advisors, and clients) before realizing the potential of AI.

Due diligence, contract review, and discovery are low-hanging fruit in this orchard, and even then the level of accuracy in 2026 is nowhere near the level required to fully transform how this work is done. The real promise of AI is not merely in doing tasks faster but in reconceiving how tasks are done, to achieve analytical functionality alongside greater reliability and efficiency.

Jennifer Chavez

AI has the potential to materially reduce time spent drafting and analyzing contracts, including changes proposed by the other side. We are seeing its potential to prepare first drafts, to help find internal inconsistencies in a document, and even offer suggestions on how to handle certain issues.

AI can also streamline due diligence by quickly summarizing and analyzing voluminous due diligence documents and even handle preparation of first draft document summaries. We are hopeful this will increase efficiency, provide more reliable work product, and reduce the potential for careless mistakes. Attorneys will have to remain alert when reviewing AI-generated drafts for accuracy and continue to think critically when analyzing AI-generated work product.

Jill Blumberg joined Practical Law from Hunton & Williams LLP, where she was a Senior Attorney in the real estate department. She previously served as an in-house attorney and the Head of Equity Closings at New York Life Investments and as Counsel in the real estate department at Dewey & LeBoeuf LLP. Jill has handled all aspects of commercial real estate transactions, representing owners, developers, institutional investors and lenders, with a particular focus on sales, acquisitions, commercial real estate development, and complex joint ventures.