Distressed Assets Offer Opportunity for Investors and Owner Occupiers

Sales of distressed commercial real estate properties should continue to increase in 2026, presenting buying opportunities not only for institutional capital but also for smaller investors and owner-occupiers. This is especially true of distressed office properties, as sales surged to a 10-year high in 2025, surpassing the previous highs of 2016 and 2024. In 2025, distressed office sales totaled $4.3B nationally, with 168 properties trading — a 31.3% increase over 2024 — according to a February CRE Daily report. Private buyers represented over half (55.3%) of all distressed office acquisitions.

Southern California Discounted Sales

While some SoCal office markets are thriving, others, like the downtowns of San Diego and Los Angeles, have been slow to rebound in the post-pandemic world. This has led to a number of eye-popping discounted sales, including the February acquisition of One and Two Columbia Place in downtown San Diego. The buildings were purchased by investment firm Ganmi Corp. from Los Angeles-based Regent Properties for $103.5 million − less than half what Regent paid for the towers in 2021. While Voit Q4 2025 research pegs the overall vacancy rate for San Diego County (14.12%) at well below the national average, the downtown market has been hit hard since the pandemic, with a 35.8% vacancy rate. CoStar reports that approximately 30% of downtown San Diego’s office inventory has changed hands since 2024, with many properties steeply discounted from their previous sale price.

The Los Angeles office market, with a vacancy rate hovering around 25%, has also seen a number of distressed sales in the last two years. The latest significant transaction was the acquisition of the Cerritos Towne Center portfolio by Nome Capital Partners for $35.6 million at a 50% discount in November, despite the property being 87% leased at the time of sale. In late December of 2024, the Gas Company Tower was acquired by Los Angeles County for $200 million after being appraised for $632 million in 2021, a staggering 68% decline in value from its peak.

Wall of Maturities

As office values decline in some markets and refinancing becomes more difficult due to elevated interest rates and tighter lending standards for this asset class, mortgage defaults and lender takebacks will occur more frequently. According to a March Mortgage Bankers Association report, the “wall of maturities,” the $875 billion in outstanding commercial mortgages held by lenders and investors, is scheduled to mature in 2026. 17% of office property loans will come due in 2026. According to Trepp, the office delinquency rate for CMBS loans hit an all-time high of 12.34% in January (though it’s important to note that the figure is far higher than those for banks, life insurance companies, or other lenders).

Commercial mortgage rates remain well above the lows seen during the pandemic, meaning borrowers seeking to refinance maturing debt continue to face high borrowing costs, despite recent cuts to the Federal Funds Rate (FFR) to 3.5%–3.75%. The problem, in many cases, lies not in the assets themselves but in their financial structures. Loans originated during the peak optimism of 2018 through 2021, often at low cap rates and full-term interest-only structures, are now struggling to refinance in today’s higher-rate environment. “The average interest rate for CRE loans issued this year [2025] was 6.24%, a notable jump from the 4.76% average on older debt coming due,” according to another CRE Daily article.

Institutional Investors

Institutional investors are pursuing distressed office properties largely as value-add opportunities. By acquiring properties in major metros with solid fundamentals at a lower basis, they’re able to invest heavily in the properties — updating lobbies and conference space and adding high-end amenities that are “must-haves” for Class A buildings in today’s markets. With construction costs and labor continuing to rise, buying a trophy asset well below replacement cost allows them to enter at a price point that lets them undercut competitors on rent while still offering an attractive tenant experience. This was the case with the Ganmi acquisition of One and Two Columbia Place in downtown San Diego, where the owners are repositioning the property by adding high-end food halls and other hospitality-level amenities to create an “experience-driven” asset that can attract and retain workers for their tenants.

Opportunities for Non-Institutional Investors, Owner-Users

Smaller-scale investors, such as private capital, family offices, and high-net-worth individuals, can be nimbler because they don’t need to go through the rigorous investment committee process. This allows them to purchase Class B and C office properties in desirable Central Business District (CBD) markets and either invest in upgrades or reposition them as medical office or retail. Another investment group purchasing distressed office space is developers seeking to convert these buildings into multifamily or mixed-use properties (which we wrote about in our Office Conversions Gaining Momentumblog post last summer).

Distressed assets may offer a golden opportunity for businesses considering owning their own real estate to build equity and control costs. As we wrote last fall, more and more business owners have moved in this direction. In an Urban Land article published last year, ULI reported that owner-user sales accounted for 20% of total U.S. office sales in the first quarter of 2025, up from 15% recorded in 2024. Before the pandemic, owner-occupier office deals accounted for 8% or less of annual deals.

The article also notes that, with many buildings struggling to fill space, this creates an exit ramp for landlords who would prefer to sell rather than invest in property upgrades to attract and retain tenants. Selling to a tenant can reduce the stress of selling a building because they are already familiar with the building and space, and don’t need convincing of its value.

And while distressed assets can be less appealing to traditional commercial lenders, owner-occupiers have access to SBA 504 and 7(a) loans (refer to our blog post from November 2023 for additional information). These programs allow for up to 90% financing, which means a business owner can acquire a $2 million distressed building for just $200,000 down. Because the SBA guarantees a portion of the loan, banks are more willing to lend on distressed properties if the business occupying the space is healthy and profitable.

While purchasing a distressed asset does not guarantee a risk-free investment, it offers the opportunity to acquire a valuable asset at an attractive entry point for upgrading, repositioning, or building equity. Doing so requires due diligence and market knowledge. To learn more about distressed asset opportunities, contact one of our trusted commercial real estate advisors.