The U.S. commercial real estate market is in the early stage of a cycle that will be dominated by the restructuring of distressed debt. It remains to be seen how long the cycle will last and how severe the distress will be, but there is no doubt that the market will not regain its balance until the vast majority of distressed debt — completed through scores of individual property recapitalizations — is resolved. This is also true in much of Europe and Japan, and many fear it will also be true in other parts of Asia, but this article discusses only the U.S. market.

A huge portion of the U.S. commercial real estate stock was financed between 2005 and 2008, when commercial banks and securitization programs alone originated US$2.3 trillion of aggressively structured mortgage debt — not to mention the additional mezzanine debt that was placed on many of the properties during this time. The combination of high loan-to-value (LTV) ratios and peaking property values created a g