After two years of volatility, the commercial real estate finance market enters 2026 on firmer ground. The final months of 2025 brought renewed deal activity, more stable interest rates and a noticeable return of investor confidence. The Federal Reserve held rates steady through the first half of 2025, then delivered two quarter-point cuts in September and October, which helped ease financing conditions and restore clarity to the market.
Tariffs have largely stabilized, and traditional lenders that stepped back during the uncertainty of the prior cycle are beginning to re-enter the commercial real estate space. Across most asset classes, the tone has shifted from hesitation to disciplined optimism.
Commercial property assessed clean energy (C-PACE) financing is moving from niche to mainstream. After total C-PACE transactions passed the $10 billion mark in 2025, the momentum heading into 2026 points to a major shift in how C-PACE is used, moving from a niche retrofit tool to an institutional capital markets solution.
Across every asset class, sponsors are looking for efficient, flexible capital to meet new market realities. C-PACE is filling that need and is a credible alternative to mezzanine debt and a tool for ground-up construction financing. This year, it will play a central role in construction lending, recapitalizations and efficiency and resiliency projects.
What to Expect in 2026
Office’s continued recovery. Post-pandemic office valuations have largely settled, and traditional lenders have re-entered the market with clearer underwriting standards. The sector’s recovery is being driven by repositioning, renovation and recapitalization. Owners are focusing on amenities, flexible terms and energy performance, and capital is flowing toward well-located assets with strong fundamentals that match the expectations of the modern workplace.
Senior housing and life sciences revival. Both sectors are primed for renewed growth as fundamentals begin to strengthen and capital gradually returns. Rolling four-quarter investment volume in senior housing reached its highest level since the second quarter of 2022, and a majority of investors surveyed plan to increase their exposure to the sector, according to a 2025 JLL report.
At the same time, life science clusters in markets such as Boston, San Diego and the Research Triangle (the region anchored by Raleigh, Durham and Chapel Hill in North Carolina) are gaining momentum again. New construction in the life science sector has been virtually nonexistent since 2023 because of elevated costs and a correction that followed the rapid expansion of 2020 to 2022, but many analysts expect development to resume this year as demand stabilizes. Venture capital investment in life sciences is also rising again, although it remains below pre-pandemic levels, reported CBRE.
A wave of development and redevelopment. Many new construction projects paused over the past few years as developers faced political uncertainty, rising inflation, higher interest rates, traditional lenders pulling back and unclear tariff impacts on materials and overall construction costs. Most of that uncertainty has now settled, and traditional lenders began returning to the market in the second half of 2025.
With two interest rate cuts last year and clearer cost expectations heading into 2026, projects that were on hold are beginning to move forward again. New development pipelines are forming, and major redevelopments are being restructured to take advantage of a more stable cost environment and improved financing conditions.
C-PACE Comes Into Its Own
C-PACE financing is positioned for rapid growth. Several key trends will define the year ahead.
Ground-up construction will lead the way. C-PACE is increasingly being used to finance ground up construction. According to PACENation, nearly 50% of C-PACE projects are now ground-up construction, a shift that would have been virtually unheard of five years ago, when C-PACE was used primarily for smaller retrofits. North Bridge pioneered an innovative structure that advances funds as work progresses and charges interest only on drawn balances. This model aligns with traditional construction loans, reducing the cost and complexity formerly associated with C-PACE.
C-PACE replaces mezz. As sponsors focus on capital efficiency, C-PACE is becoming a more effective alternative to mezzanine debt or preferred equity. C-PACE is replacing traditional senior mezzanine financing altogether, allowing developers to reach higher leverage at a lower overall cost. Because C-PACE can finance virtually all qualifying hard costs for projects that are built to code, it provides a path to 70% to 80% total leverage without relying on mezzanine structures that carry higher pricing and tighter covenants. It is a passive, non-recourse, structure-light instrument that is long-term yet fully prepayable, giving sponsors flexibility while preserving project economics.
Credit ratings will strengthen. As volume grows and deal structures become more uniform, C-PACE securitizations are expected to achieve higher credit ratings. Pools that were once rated in the single-A range are increasingly viewed as candidates for much higher ratings, with the potential to approach triple-A levels and move closer to the risk profile associated with government bonds. This evolution mirrors the early trajectory of the CMBS market, which also began as a niche financing product and eventually became a widely traded, institutionally accepted asset class once there was enough standardization, performance data and rating-agency comfort. As C-PACE follows a similar path, spreads are likely to tighten and investor demand should broaden, creating a deeper and more liquid market for assessment-backed securities.
Standardization will expand access. Program modernization across the country is making C-PACE more accessible and predictable for developers and lenders. In February 2025, Texas increased its maximum loan-to-value ratio from 25% to 35% and expanded repayment flexibility with capitalized interest and interest-only periodsof up to five years. New York City released major updates in late 2024 that opened eligibility to new construction, major renovations and ground-leased buildings, introduced standardized interconnection requirements (SIR) exemptions for full electrification and certain pre-qualified measures, and allowed an incremental cost approach that makes compliance easier for large projects. New Jersey opened C-PACE applications for the first time in 2025, and New Hampshire recently finalized its enabling legislation.
As more jurisdictions refine guidelines and streamline approval processes, C-PACE is becoming easier to integrate alongside traditional lending, which is accelerating adoption across asset classes nationwide.
