Goldman Sachs and Deutsche Bank Write Down 85% on Distressed CRE: The 'Extend and Pretend' Era Is Over

For three years, the commercial real estate industry operated on a polite fiction. Lenders held distressed properties on their books at values that reflected what the assets were worth in 2021 — before interest rates rose, before remote work became permanent, before office vacancy rates cracked 20%. The strategy had a name in the industry: "extend and pretend." Give struggling borrowers more time, avoid recognizing losses, and hope the market recovers.

In May 2026, according to the Los Angeles Times, that era is definitively ending.

Major lenders including Goldman Sachs Group and Deutsche Bank, as well as smaller regional institutions, are now showing "more willingness to foreclose on troubled properties or offload nonperforming loans, even if it means steep losses," the Times reported. In some cases, writedowns have reached 85% of a loan's original payoff amount — a staggering destruction of value that acknowledges the gap between 2021 valuations and today's market realities.

The Numbers Are Stark

More than $130 billion in distressed commercial property debt is now moving through the system — being foreclosed, sold at steep discounts, or restructured under duress. According to Trepp's Q1 2026 Quarterly Data Review, CMBS delinquency volumes increased by 5.17% in the first quarter alone, reaching $45.83 billion in total delinquent loans with an overall delinquency rate of 7.55%.

Those numbers represent a fraction of total commercial real estate exposure. The full pipeline of loans that will eventually need to be restructured, refinanced at higher rates, or written down runs into the hundreds of billions.

The Netflix Deal: A Sign of the Times

Perhaps no single transaction captures the depth of the CRE repricing better than the Netflix deal now in progress. Netflix is in active talks to purchase a historic Los Angeles movie studio — one that sold for $1.85 billion in 2021 — for a fraction of that price, after lenders led by Goldman Sachs took over the property following the borrower's default.

Goldman Sachs, one of the most sophisticated real estate investors in the world, is now selling a trophy asset in one of the strongest entertainment markets in the country at an implied discount of 60–80% from its peak valuation. The message to the broader market is unmistakable: there is no price at which some 2021-era deals can be made to work in a 5%+ interest rate environment.

Why Now?

Several forces have converged to break the extend-and-pretend stalemate.

Rate clarity. For the past two years, lenders justified extensions by pointing to uncertainty about where rates would eventually land. With the 30-year Treasury now firmly above 5% and the Fed under new Chairman Kevin Warsh showing no clear inclination to cut, that uncertainty has resolved — in the wrong direction. Lenders can no longer pretend that refinancing at lower rates will bail out their borrowers.

Regulatory pressure. Bank regulators have become increasingly skeptical of commercial real estate portfolios carrying "evergreen" loan modifications. Examination results from 2025 and early 2026 have pushed banks to begin recognizing losses that should have been taken years ago.

The math no longer works. Many extend-and-pretend loans involve office properties where the fundamental cash flow case has collapsed. Vacancy rates above 20% nationally — and approaching 40% in markets like Seattle — mean that even at zero interest cost, the properties cannot generate enough rental income to service their debt. No amount of additional time changes that arithmetic.

The End of Extend-and-Pretend: What Comes Next

When lenders finally clear distressed assets from their books, it is both painful and ultimately necessary. The immediate effect is a wave of forced sales that puts downward pressure on comparable property valuations — worsening the mark-to-market losses for every other lender holding similar assets.

Regional banks are particularly exposed. According to a YouTube analysis from Gilded Fall, U.S. banks are facing a $500 billion crisis driven by nearly $1 trillion in commercial real estate loans maturing and needing refinancing in 2026 — many of which were originated when rates were 3–4% and now require refinancing at 6–8%.

Smaller banks, which hold a disproportionate share of CRE loans relative to their capital base, face the most acute stress. Some will need to raise capital. Others will be acquired or fail.

The commercial real estate sector has not bottomed. The extend-and-pretend era insulated the financial system from recognizing the full scale of losses — but it did not make those losses disappear. The reckoning is now underway.

Essential Reading for CRE Investors and Observers

• Commercial Real Estate Investing for Dummies by Peter Harris — A foundational guide for understanding how CRE cycles work and how to identify stress signals.
• The Big Short by Michael Lewis — The definitive account of how a real estate debt crisis unfolds from the inside.
• Financial Shenanigans by Howard Schilit — How to identify accounting manipulation and hidden balance sheet risk before a crisis hits.

Sources: Los Angeles Times, Trepp Q1 2026 Quarterly Data Review, Reuters, Bloomberg, Financial Times