Legal Insights
Commercial real estate transactions often begin with a relatively straightforward question: what is the subject property worth? In today’s market, the answer is not always as clear as anticipated. These transactions are increasingly taking place against a backdrop of valuation uncertainty. While differences in pricing expectations between buyers and sellers are a common feature of any market, recent economic conditions have made those differences more pronounced, and in some cases, more difficult to reconcile.
One factor contributing to this environment is the volume of commercial real estate debt coming due in the near future. According to the Mortgage Bankers Association, approximately $875 billion in commercial and multifamily mortgage debt is scheduled to mature in 2026[1], following roughly $957 billion in 2025[2]. As borrowers navigate refinancing in a higher interest rate environment and lenders continue to apply more conservative underwriting standards, questions of value are often central to both refinancing and acquisition activity.
Buyers, sellers and lenders are frequently approaching valuation from different perspectives. Higher borrowing costs, evolving property fundamentals and shifting return expectations are just a few of the notable factors which have contributed to differing views of value. This has caused pricing uncertainty on all sides of the transaction that extends well beyond the initial purchase price negotiation. From expanded due diligence requests to more flexible financing arrangements, parties are adapting to address a market in which agreement on value is no longer a foregone conclusion.
Why Valuation Gaps are Appearing More Frequently
Expectations regarding future performance have always been central to commercial real estate transactions. What has changed in recent years is the degree of uncertainty surrounding those expectations. The elevated rate environment has altered acquisition economics across many property types. For buyers relying on debt financing, increased borrowing costs significantly affect projected returns and purchasing power. Practitioners should expect lenders to apply heightened scrutiny to projected income streams and to offer lower leverage levels than in prior cycles.
Market conditions have also varied across asset classes. Office properties, for example, continue to face questions regarding long term occupancy trends, while industrial and multifamily assets have generally demonstrated greater resilience. Even within a single asset class, local market conditions may influence how participants evaluate risk and future performance.
A seller who acquired or refinanced a property under different market conditions may reasonably view an asset’s value differently than a buyer underwriting the same property in today’s environment. When lenders introduce a third perspective through their own valuation and underwriting analysis, those differences can become even more evident.
The result is a transaction process that requires additional negotiation and creativity before a deal can move forward. These dynamics play out most visibly in the negotiation phase itself.
The Transactional Impact
One of the most immediate impacts of valuation uncertainty is a longer and more deliberate negotiation process. When buyers and sellers disagree on value, discussions frequently extend beyond purchase price. Buyers may seek additional diligence rights, financing protections or other contractual mechanisms designed to address perceived risk, whereas sellers may be reluctant to make significant price concessions if they believe current market conditions do not accurately reflect the long-term value of the asset. As a practical matter, this often results in increased attention to provisions that likely would receive less scrutiny in a more stable market. Financing contingencies, extension rights, access provisions, termination rights, and similar provisions can become central to the negotiation process.
Valuation uncertainty has also heightened the importance of due diligence. Buyers are spending more time evaluating the assumptions underlying a property’s projected performance. These assumptions often include expected lease income, tenant stability, operating expenses, capital improvement needs, and upcoming lease expirations, all of which have the potential for significant financial impacts and should be thoroughly examined during the due diligence phase. Information that may have once been viewed as routine diligence can take on a greater significance when a buyer is attempting to determine whether a seller’s valuation assumptions are supportable. For counsel, this increased focus on diligence often translates into more extensive document review and greater attention to representations and warranties.
Financing Considerations
Valuation uncertainty typically becomes the most apparent when financing enters the picture. Even where a buyer and seller have agreed on a purchase price, a lender’s underwriting analysis may ultimately determine whether the transaction proceeds on the anticipated terms. If an appraisal or underwriting review supports a lower value than expected, a borrower may be required to make additional contributions or reconsider the economics of the transaction altogether.
Financing considerations have therefore become a more significant part of transaction planning and negotiation. Borrowers seeking acquisition or refinancing debt may encounter lower leverage levels and increased lender scrutiny of property performance and projected cash flow. These factors can affect not only the availability of financing but also the amount of equity required to complete a transaction. As a result, lenders are increasingly playing a more active role in shaping transaction structure and timing. In some cases, financing considerations are being addressed earlier in the negotiation process to avoid surprises later in the transaction.
Adapting Through Alternative Deal Structures
Despite these challenges, commercial real estate transactions continue to move forward. In many cases, parties are adapting through greater flexibility in deal structure. Seller financing has received renewed attention in certain transactions, particularly where traditional financing may not fully support the purchase price. By providing a portion of the financing, sellers may be able to bridge a valuation gap while facilitating a transaction that might otherwise stall.
Additional options for parties to consider include contingent payment arrangements and purchase price adjustment mechanisms designed to allocate risk over time rather than requiring complete agreement at closing. For example, earnout provisions tied to net operating income stabilization over a defined period allow buyers to defer a portion of the purchase price until the property demonstrates projected performance. While these structures are not appropriate in every transaction, they can provide a framework for addressing uncertainty regarding future performance. Similarly, transaction timelines themselves have become more flexible. Extended due diligence periods, financing extensions, and modified closing schedules may provide parties with additional time to assess and respond to changing market conditions.
Looking Ahead
Valuation uncertainty is unlikely to disappear in the near future as market participants continue to navigate changing economic conditions. At the same time, transaction activity demonstrates that uncertainty has not prevented deals from occurring. Instead, valuation uncertainty appears to be influencing how transactions are negotiated and structured. Buyers, sellers, lenders, and their counsel are increasingly focused on flexibility and risk allocation, and overall transaction mechanics as they work to navigate pricing disagreements.
For commercial real estate attorneys, understanding these dynamics is becoming an important part of advising clients in today’s market. While valuation itself may ultimately be determined by market forces, the contractual tools used to address valuation uncertainty remain firmly within the realm of transactional practice. As a result, counsel who can anticipate these issues and respond thoughtfully to them will be better positioned to help clients move transactions from negotiation to closing.
[1] https://www.mba.org/news-and-research/newsroom/blog-post/commercial-real-estate-loan-maturity-volumes
[2] Id.
——————————————————————–
This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
This Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
