REAL ESTATE NEWS

Delinquency rates for office loans in commercial mortgage-backed securities are at a record high, with January's total coming in at 12.34%. Add that to the fact that more than half of the roughly $100B in CMBS maturing this year are unlikely to be repaid in full. However, this will lead to opportunities across CRE, especially in California.

The "extend and pretend era" appears to be ending as lenders call in troubled debt, while office fundamentals remain under pressure.

Charles Wilson, director of EisnerAmper's real estate services group, told GlobeSt.com that California is entering a recapitalization-driven opportunity cycle rather than a systemic distress cycle.

He said the most meaningful activity is emerging from refinancing pressure on assets capitalized between 2019 and early 2022.

"Higher interest rates and reduced lender proceeds are creating equity gaps, particularly in office and certain transitional multifamily assets," Wilson said.

"Even properties that are performing well operationally can be forced into recap if debt is maturing at today's higher rates and proceeds don't cover the takeout. Assets with near-term lease rollovers and debt maturities, plus pending capex requirements, tend to create situations where sellers can't wait, and lenders don't want to own, making room for structured buyers with debt and rescue equity investments."

Trepp has provided a refinance-gap screen that flags CMBS loans maturing within 12 months with a debt yield below 7%, identifying about 379 loans in California totaling about $12.4B. This highlights where recapitalizations, note sales and distressed acquisitions are most likely to surface as maturities collide with tighter proceeds and higher rates.

Each California Metro is Different

The opportunity set varies by metropolitan area, Wilson said.

In San Francisco and Oakland, office valuations have undergone the most significant repricing, according to Wilson. Urban core Class B inventory with near-term rollover has seen substantial basis correction. That is beginning to attract capital focused on long-duration repositioning and potential adaptive reuse.

In San Jose, office recalibration is closely tied to technology hiring cycles. While tenant footprints have rationalized, innovation-driven demand tied to AI, semiconductors and R&D functions provides longer-term structural support.

In Los Angeles, distress is highly submarket-specific. Westside and media-centric nodes are outperforming portions of the Downtown core, Wilson said.

"Recapitalizations here are often strategic—focused on lease-up, amenity upgrades, or feasibility for conversion—rather than lender-forced dispositions," according to Wilson.

Orange County and San Diego remain comparatively stable. Capital events in these markets tend to reflect refinancing adjustments rather than widespread dislocation, Wilson said.

In Sacramento, the stabilizing effect of state government employment continues to support baseline performance in multifamily and suburban office.

Trepp provides a basis reset signal data point from CMBS reappraisal data over the past year, showing California office values are down a median of about 48% for urban office properties versus about 35% for suburban office properties.

This suggests that the largest recapitalization and distressed-acquisition entry points are concentrated in urban cores and include larger equity wipeouts, wider refinance gaps, greater motivation for note sales and JV recapitalizations.

"Overall, the most compelling opportunities are tied to basis realignment and capital stack restructuring—not broad liquidation," Wilson said.

California's Office Sector Recalibrating

The office sector is undergoing structural recalibration, not simply cyclical softening, he said. "Hybrid work has reduced aggregate demand, but the impact is uneven across asset classes and markets," Wilson further explained.

A defining theme statewide is bifurcation.

Across Los Angeles, Orange County and San Diego, high-quality, recently modernized Class A assets continue to capture most of the leasing activity.

Tenants are prioritizing amenity-driven environments, sustainability features and flexible layouts. Commodity Class B inventory without differentiation is subject to persistent vacancy pressure.

Cushman & Wakefield reports that the Los Angeles office market ended Q4 2025 with vacancy at about 23.4% and net absorption for all of 2025, coming in at roughly -19,000 square feet.

In San Francisco and Oakland, vacancy remains elevated and sublease availability continues to influence effective rents, even as signs of improvement in leasing and absorption emerge.

Capital markets liquidity is largely concentrated in stabilized, credit-anchored assets. CBRE reports that the San Francisco office market ended Q4 2025 with vacancy down to about 32.8% and positive net absorption of over one million square feet.

San Jose reflects a different profile. Demand is closely aligned with technology sector employment and R&D intensity. Certain innovation uses remain less substitutable in remote environments, which supports differentiated long-term demand relative to traditional CBD office markets.

Sacramento demonstrates relative resilience given its concentration of public-sector tenancy.

Trepp provides some reset and bifurcation evidence in its CMBS reappraisal data over the past year, showing a clear valuation reset for California office properties.

Again, this further explains that hybrid work has hit urban cores in California harder.

Looking forward, Wilson said the office market's equilibrium will likely reflect structurally lower aggregate demand but a stronger premium on quality, flexibility and ESG performance.

"Conversion and adaptive reuse will continue to be evaluated in markets where vacancy and building configuration align with redevelopment feasibility," he said.

Data Centers Impacting California's Industrial Market

Meanwhile, data centers are influencing the industrial sector, but in a highly localized way.

The primary constraint in California is infrastructure—particularly power availability and transmission capacity, as state is frequently cited as having the highest retail electricity prices in the continental U.S.

In San Jose and parts of the East Bay, proximity to fiber networks and technology ecosystems makes these markets strategically attractive. However, grid capacity and utility timelines are gating factors for large-scale development. CBRE's Silicon Valley data center market profile notes a direct "constraint" signal, with power limitations causing planned data center sites to revert to industrial use.

In Los Angeles County, selective adaptive reuse of industrial facilities for data center conversion is occurring.

"That said, hyperscale clustering remains more limited than in other national hubs due to entitlement complexity and infrastructure constraints," according to Wilson.

In Orange County and San Diego, data center demand contributes to competition for industrial land in already supply-constrained markets. However, logistics—driven by port distribution, e-commerce and supply chain realignment—remains the dominant driver of industrial demand.

Sacramento is increasingly being evaluated as a potential alternative location due to land economics and improving connectivity, though clustering remains in its early stages.

"From a valuation standpoint, power-entitled industrial sites are becoming increasingly strategic assets," Wilson said. "Infrastructure capacity is playing a larger role in underwriting decisions across California."

Source: GlobeSt/ALM