Distress Hiding in Plain Sight: Market commentary from Virtú CEO, Mike Green

The question we hear most often at conferences is some version of the same thing: where is the distress? Transaction volume has recovered modestly, and defaults remain below what prior cycles would have predicted. The capital markets, by most accounts, are functioning. So is there distress? We believe there is, but you need to know where to look.

The data is hard to come by. Private credit is private, and private lenders do not file public disclosures the way banks do. The mezzanine loans, preferred equity positions, and bridge debt created over the last several years are under no obligation to report underwater positions. Much of the aggressive investment activity in high-growth markets like Phoenix, Nashville, and Austin was financed not by agency debt (Fannie Mae/Freddie Mac), but by a wave of floating-rate, high-leverage private capital that flooded into value-add and development transactions in 2021 and 2022.

When rates moved, those loans were not cleared. They were extended, sponsors recapitalized, and new funds were raised before old funds wound down, injecting fresh capital that sustained valuations and delayed the moment of reckoning. The result is a market where properties that should have cycled through distress sales are instead languishing: occupancies at 80%, bad debt accumulating, maintenance deferred, and two-to-three months of free rent offered on new leases. That last point shouldn't be overlooked: in new product, concessions are the distress. A market giving three months free on a beautiful building is a market in trouble.

The unwind is happening, but mostly behind closed doors. Private credit funds face redemptions and a more challenging fundraising environment. The extension and recapitalization mechanisms that sustained the cycle are becoming less available to owners, where many are now on their second and third iterations of temporary relief. Our thesis is that lenders will not tolerate a third or fourth extension, and the clearing that has been deferred thus far will be increasingly visible as we enter 2027.

The distress is not visible from a desk. Go to east Phoenix and drive through a workforce apartment parking lot, or walk a struggling value-add property in Denver, or visit any property on concession row in a high-supply market. The deterioration is there for anyone willing to look at the properties, and the longer the reckoning is delayed, the deeper it gets: capital is flowing to extend loans, not to fix buildings.

Identifying dislocation before it reaches the transaction market is the foundation of our process.

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