Why 2026 Could Be a Golden Era for Distressed Real Estate Investing
- Kenneth Danna
- Mar 29
- 13 min read
What does distressed real estate mean? When the average person thinks of distressed real estate, they likely think of boarded-up houses, 2008-style foreclosures, and a general sense of everything falling apart. However, the reality of the world heading into 2026 is a far cry from the last real estate debacle. In order to understand the reasons for distressed properties and the opportunity they present for investors, it’s necessary to consider the macroeconomic picture as well as the microeconomic events that lead individuals to sell their properties. This piece is meant as a learning module, and we’ll aim to educate both seasoned and first-time investors about the factors affecting the real estate landscape, what makes a property distressed, and the importance of speed and liquidity. We’ll also delve into the ways that Shore Acres Capital structures their investments to take advantage of this opportunity and the inherent risks of this type of investment and how they can be mitigated. While we’re not here to sell you on a boom, we want to educate you as a means of making a determination as to whether this type of focused, short-duration private equity investment is right for you. As a means of grounding this discussion firmly in reality, we’ll include citations for the statistics and legal information discussed.
An unusual economic reset is underway
Three years into the Federal Reserve’s rate hikes, the US housing market is still adjusting to the impact. According to veteran housing expert Rick Sharga, “we’re in the third year of a five-year housing reset.” Home prices surged by over 40 percent over the pandemic era, and just as buyers were getting accustomed to those levels, mortgage rates began to double. This “one-two punch has decimated housing affordability for first-time buyers.” Existing home sales plummeted to four million in 2023-2025 from over six million in 2021 (1). “I think sales volume will continue to hover around historic lows – around four million units – in 2026, but will improve slightly over 2025.” So, to summarize, the housing market is neither in a free fall nor a frenzy.
This reset is particularly hard for those who borrowed when money was cheap. Commercial real estate borrowers are facing a “maturity wall.” In other words, $1 trillion of outstanding loans will mature by the end of 2025, while another $1.5 trillion will mature by the end of 2026 (2). These loans had interest rates ranging from 3 to 4 percent. Now, they have to pay almost double to refinance. They cannot put in new capital or borrow money, so they have to sell or risk default. The result is not a general market collapse but rather a steady drip of properties coming to market under duress. Meanwhile, transaction volume remains low; in fact, as noted by EY, transaction volume in real estate has declined by approximately 70 percent due to rising interest rates, tightening credit, and general uncertainty. While macroeconomic tailwinds have not disappeared.
According to Ares Management, real estate investors are looking at 2026 as an inflection point, with asset values or rents having stabilized or increased in key sectors, including logistics, apartments, and, to some extent, offices and retail. Transaction volumes are again on the rise, while the debt capital markets, which had shut down during the interest rate shock of 2022-2023, are now opening (3). Traditionally, the best real estate return periods occur at such inflection points; Ares observes that in recovery cycles, unlevered returns in commercial real estate have averaged 13 percent on a yearly basis, 400 basis points above their long-term average. The recovery process, however, is not even across all sectors, as some of those in the “New Economy”—data centers, logistics, and multifamily—benefit from the growth driven by artificial intelligence, while owners of transitional or overleveraged properties must address refinancing risk and lagging demand.
Understanding “distress” in today’s market
Not all discounted properties are distressed, and not all distressed properties are foreclosures. Distressed refers to the motivation behind the owner’s need to sell at a discounted price due to financial or operational difficulties. The “Three Ds” is an easy way for real estate professionals to define the triggers for distressed sales: divorce, debt, and death (4). Divorce can necessitate the forced sale of a marital home if neither party can afford to buy out their spouse. The debt, which could range from medical bills to credit card debt or multiple mortgages, may prompt owners to sell in an attempt to avoid foreclosure. Death or estate settlements may result in heirs inheriting properties they would rather sell than own. All these life events are ever-present in the market, irrespective of interest rate cycles, and they generate small pockets of motivated sellers.
In addition to the Three Ds, other factors also contribute to distressed property supply:
Stalling renovations and failed house flipping ventures. With the rise in material and labor costs, coupled with the slowing down of buyer demand, the profitability of house flipping ventures is diminishing. Profits from house flipping ventures hit a 17-year low in 2025 (5), according to ATTOM Data Solutions. Those investors who initiated house flipping ventures in the good old days are now faced with the reality that their budgets have blown up or that the demand for the property is slowing down. They might want to cut their losses and sell the property rather than putting in more money.
Maturing loans and over-leverage. This is already discussed in the above paragraphs. Those who are faced with the prospect of having to pay more in refinance rates are forced sellers. This is particularly true in the case of office and retail space, where the occupancy rates are not recovering.
Vacancy or underperformance. Short-term rental investors, for example, might have anticipated that demand for such properties would soar. Alternatively, traditional landlords might face rising insurance and property tax expenses that cut into cash flow. Others might simply want to redeploy their capital into more lucrative investments.
The numbers demonstrate that the level of distress is rising but is still very low compared to historical crisis levels. In the first quarter of 2025, for example, approximately 94,000 U.S. properties initiated the foreclosure process, or one in every 1,515 homes (6). By the second quarter, the number of properties in foreclosure jumped to 100,687, a 13 percent increase from the prior year.These numbers represent a peak above the pandemic low but remain nowhere near the 18 percent share of distressed sales seen during the Great Recession. According to the National Association of REALTORS®, distressed sales (foreclosures and short sales) represent only 2 percent of all sales in 2025. In other words, there is enough distress to present opportunities but not enough to flood the market with bank-owned homes.
It is also necessary to recognize the longer timeframes associated with distressed transactions. AmeriSave’s guide indicates that the average time to close distressed transactions can range from six months to a year, while it is only six to eight weeks for an ordinary home. The length of foreclosure processes varies from state to state. Judicial foreclosures, for example, occur in California, where it can take two to three years. While it is possible for distressed transactions to occur within short timeframes, it is necessary to recognize that delays can occur, as illustrated by the example where it took nine months to close only one foreclosure. There are other issues associated with short sales and REO transactions, which can complicate the process, especially with the involvement of lienholders and stringent contracts. Distressed investors need to recognize that not all distressed transactions close within short timeframes.
Why high rates and the debt maturity wall matter
Distress is not only driven by individual circumstances but is also subject to the influence of various macroeconomic factors. The housing boom since 2020, driven by low interest rates and pandemic-related demand, saw housing prices reach record highs. With the Fed increasing rates rapidly in 2022, financing costs have gone through the roof. According to EY, the “rapid increase in interest rates and a slowing transaction market have created a risk of economic distress. In addition, refinancing property debt is becoming more difficult."(7) Transaction volumes have decreased by approximately 70 percent, capitalization rates have not kept pace with the increase in interest rates, and pricing adjustments are ongoing in some sectors. In the case of the office sector, for example, remote work has resulted in decreased demand. A tower in San Francisco was sold for only 20 percent of its pre-COVID-19 asking price.
Meanwhile, additional assets are coming onto the market as a result of the maturity wall of assets discussed above. A wave of commercial loans, which were originally made when rates were 3–4 percent during the 2010s, are now needing to be refinanced when rates are 6–8 percent. Many of these borrowers are not able to make the math work without putting additional capital into the deal, and many of those who are not willing or able to do so are deciding to sell. In terms of what industry leaders can do, according to a 2026 outlook for commercial real estate from Deloitte, they can “recalibrate underwriting assumptions, consider the impact of increased financing and exit cap rates, and stress test their portfolios for adverse scenarios. Alternatively, they can focus on improving the underlying fundamentals of distressed properties and share their recovery plans openly with lenders and investors.” (8) This, again, speaks to the fact that distress is not always about buying a bargain, it’s about turning the asset so that it can be refinanced or sold for a reasonable value.
The power of cash in a rate‑sensitive market
In a high-rate environment, cash is king. According to Realtor.com, one out of every three home sales in early 2025 was an all-cash transaction in the United States (9). Sellers want cash because it speeds up the transaction and avoids problems with appraisals and financing contingencies. Buyers with cash want to avoid the cost of debt. This is particularly true in distressed sales. Homeowners facing foreclosure, divorce, or an impending loan maturity date value certainty above all else. A buyer with cash in hand can often negotiate a lower price in exchange for taking over the property “as is.”
Being a cash buyer does not mean we are stashing money away under a mattress. It simply means we have access to liquid capital. We achieve this through our fundraising efforts from investors on a deal-by-deal basis. We acquire a property through a separate New York limited liability company. This company is funded 100 percent with cash. We don’t use any leverage. This allows us to be quick to react when a seller wants to sell. It also provides investors with a clear investment in a single asset. We don’t have financing contingencies, and we are able to drive a hard bargain for a great price, even below replacement cost.
While cash may seem like a relatively conservative approach, it can also help us increase our returns by adding speed and expertise to the equation. Distressed assets typically require renovation or repositioning. Paying cash allows us to start work immediately upon closing, rather than waiting for a loan to fund construction draws. This shortens our overall timeframe and therefore limits our exposure to market fluctuations. Furthermore, because our deals have a relatively short duration of three to 12 months, investors' capital is recycled quickly. This contrasts with many private equity buyouts, which can have much longer hold periods. According to an article by S&P Global, private equity holding periods have actually been increasing, and many private equity firms are setting up “continuation funds” to hold assets for longer periods of time. This is a situation we’re referring to here simply to highlight a contrast.
Benefits of short‑duration, unlevered deals in distressed real estate investing
Also, many private equity funds in the real estate sector have a long-term hold strategy: buy an apartment building and hold it for five to seven years to stabilize the rent and then refinance and sell. These strategies have good returns but involve exposure to various market cycles. We prefer short-duration projects, which have a hold of three to 12 months. These have advantages:
Limited interest rate exposure. By acting quickly, we do not lock in at high interest rates or gamble that rates will come down. If the Fed lowers rates or financing becomes more attractive, we will be able to redeploy capital into new deals.
Faster capital turnover. This allows investors to receive their capital and profits in a timely fashion and redeploy capital to future deals. This is in contrast to longer hold strategies that lock capital away for years and force investors to wait for fund liquidation.
Targeted problem-solving. We target assets where it is easy to understand how we will add value: completing a renovation, curing deferred maintenance issues, clearing title issues, or repositioning the asset to a different use. After we solve the problem, we will sell to end-users or rent at market rates.
Alignment with current market cycles. A research by Ares indicates that real estate recovery cycles are five-year cycles, with the best returns coming at the early stages (10). By undertaking short projects at the early stages, we will be able to achieve high returns while avoiding the later stages, where competition results in increased prices.
This strategy is not without its challenges: it requires local expertise, effective renovation management skills, and access to below-market value deals. However, for those investors who seek liquidity and flexibility in their investments, this risk-return profile is an attractive proposition.
Where returns come from in distressed investing
High returns in distressed real estate are not a result of speculation on market value appreciation but rather a result of execution. The fundamental causes are:
Purchase Discount. We acquire for a price lower than intrinsic value due to the forced nature of the sale. This provides a margin of safety and ensures we make money on the purchase, not just the sale.
Focused Renovation. Many distressed properties require physical rehabilitation. We concentrate on those improvements that increase value, such as structural, safety, and cosmetic improvements. We avoid over-improvement. We improve the property sufficiently to be attractive to the target buyer or tenant but not so much that we create a luxury product where it’s not valued.
Repositioning. The best use of a distressed property might have changed. A single-family home might be converted from a short-term rental to a long-term lease. A small office building might be converted to a co-working building.
The timing of the exit. We sell or refinance the property when it is stabilized and demand is up. Because we buy at a discount and improve the property, we do not need a hot market to earn a good return. If the market is down, we can fall back on renting or holding until the market improves.
Investors often ask if the returns are from the use of leverage. In our model, the answer is no. The returns are from the discount we buy at and the improvement we make. Because the deal is done in cash, we do not have any interest expenses and therefore do not have the risk of losing the property if we are not able to make the mortgage payments. Leverage can greatly magnify gains, but it also greatly magnifies losses. With the current interest rates and the uncertainty of what they might do in the future, not having to deal with debt is attractive.
Risks and how we mitigate them
While investing in distressed properties is not risk-free, there are some risks that we consider:
Budget overruns: Unexpected repairs or cost inflation can blow up a budget. To mitigate this risk, we inspect properties carefully and hire experienced contractors.
Timeline uncertainty: As mentioned above, it may take months to complete a foreclosure or a short sale. We assume conservative timelines but also remain flexible in case it takes longer.
Legal and title risks: There may be liens on distressed properties or code violations or probate issues. Our due diligence checklist includes checking titles, liens, local government records, and permits. We also work with real estate attorneys to resolve any issues before closing a deal.
Market risks. The macro environment could change over our holding period. However, we don't control interest rates or buyers’ attitudes. We control our focus on intrinsic value, not speculative value. If need be, we can lease the property to cover holding costs.
Operational risks. Properties left vacant are often vandalized or occupied by squatters. We immediately place our properties under contract, and we utilize local property management to protect against damages.
Deloitte’s report to commercial real estate industry leaders is to improve risk management and transparency, stress-test portfolios for rate shocks, and share recovery plans with lenders and investors. This is our philosophy too. Our investors receive detailed budgets, timelines, regular progress reports during the renovation phase, and transparent accounting. We only undertake projects in which we have a plan to add value and exit thoughtfully.
Looking ahead: recovery and discipline
As we look to 2026, we will continue to see changes in the housing market. According to Sharga, consumer debt is at an all-time high of $18.4 trillion, and serious delinquency rates on credit cards, auto loans, and student loans have increased. Increasing costs of property taxes and insurance make it more difficult for people to make mortgage payments (11). Delinquencies on mortgage loans are low but serious delinquencies on mortgage loans have increased for four consecutive quarters. The FHA has also tightened their loss mitigation process, increasing the potential for more foreclosures. However, there is over $34 trillion in equity that will cushion this potential issue, and delinquency rates are still 30 percent below those in 2019. There is a need to understand that there will be more distressed sales but not an influx of defaults.
Another trend is the evolving role of investors. According to MortgagePoint, investors own 20 percent of single-family homes in America and accounted for 33 percent of purchases in the second quarter of 2025. There is a huge misperception about investors in America: 91 percent of investor-owned homes are owned by mom-and-pop landlords with ten or fewer properties. Furthermore, large institutional investors with over 1,000 properties make up less than 2 percent of investor-owned homes and have been net sellers in six consecutive quarters. Many large investors have moved to invest in build-to-rent communities rather than competing for existing homes. This means that in distressed properties, there are not Wall Street giants but rather local operators and boutique firms like ours that can bring hands-on expertise to individual properties.
Finally, the overall commercial real estate market is beginning to experience a recovery. Ares Management states, "Asset values have reset, and liquidity is re-entering the debt markets. Real asset direct lending is thriving, and distressed assets are providing entry points for patient capital." However, Deloitte is cautioning investors to "recalibrate underwriting, stress portfolios, and increase transparency." The point is clear: the next few years will be a time for disciplined operators to separate the recovery potential from the assets likely to continue to struggle. "Distressed investing is not about following a trend; it is about problem-solving, managing risk, and aligning incentives."
Conclusion: solving problems in a unique window
Distressed real estate investing in 2026 is not the “bottom-fishing” exercise that many people envision. Rather, it’s understanding the motivations of the owners of distressed properties, understanding the macro factors that are causing selective distress, and utilizing liquidity and expertise to turn distress into value. Higher interest rates, a debt maturity wall, and stalled projects have provided us with opportunities to buy distressed properties for less than their replacement cost. However, a macro reset and a more stable market mean that not all properties are distressed, and one must be discerning. The model of Shore Acres Capital, cash purchases, short holds, manager-managed LLCs, and clear contractual agreements provides a vehicle for investors to participate in this niche without the leverage risk that many other private equity vehicles face. The 8-12 percent returns we are targeting are a balance of opportunity and prudence. We want to stress, however, that this is a goal, not a promise, and that investors should do their own due diligence.
As we commonly say, we don’t buy real estate, we buy problems. By focusing on solving a particular problem, as opposed to betting on the general market, we can achieve more value that is not tied to the overall markets. The current market provides a unique opportunity where distress is increasing, but not overwhelming, rates are high but stable, and recovery trends are emerging. For those who are willing to learn, partner with seasoned operators, and have realistic expectations, 2026 can be a golden age for distressed real estate.
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