Real estate finance in 2026: cautious confidence for commercial and development lending

Last year marked the start of recovery following a prolonged period of volatility driven by inflationary pressure, rising interest rates and constrained liquidity. In 2026, the market is expected to continue in a state of prudent recovery for lenders and borrowers alike, although with slower growth than seen in 2025.

The challenge for most is no longer simply managing downside risk but positioning for steady growth in a market that remains selective, regulated and cost sensitive.

From our experience of advising borrowers, banks and alternative lenders across the UK, the defining feature of the year ahead is pragmatism, disciplined lending, careful structuring and a renewed focus on asset quality. In addition, cost of debt will continue to reduce due to lower interest rates and greater competition between lenders.

Borrowers are relying more on brokers given the ever-increasing and diverse lending market and are encouraged to engage early to find the best deal out there for their needs – whether that’s pricing, flexible structures or delivery times and to meet lenders’ (potentially additional) requirements.

Improving macro conditions, but no return to pre-2022 norms

Stabilising inflation and an easing interest rate environment are helping to restore confidence across certain sectors of the CRE finance market. With Bank of England base rates expected to settle, affordability has improved and transaction activity continues to recover gradually.

However, pricing discipline remains firm. Credit committees are focused on sustainable cashflows, realistic exit assumptions with baked-in refi stress and enhanced DSCR covenant protection. The more aggressive leverage levels seen in previous cycles have not returned and there is little appetite for underwriting speculative risk without meaningful sponsor support.

Commercial real estate: selective recovery and sector differentiation

Most asset types will see some sort of boost, but commercial property isn’t a single market; there are still gaps between those sectors which are delivering and those underperforming. We’re seeing particular strength in well-located, energy-efficient assets with strong tenant demand such as logistics, industrial, data centres and healthcare.

Flexible workspaces continue to attract interest, driven by financial and professional services occupiers seeking adaptable accommodation. By contrast, secondary office stock and assets with poor ESG credentials remain challenging to rent and finance, often requiring additional equity or repositioning strategies. In some cases, lenders may want to see upgrades before financing is even considered, creating extra costs to borrowers or a need to find bridging finance.

From a legal perspective, this renewed activity is driving increased focus on asset management provisions, ESG-related covenants and forward-looking repair and sustainability obligations within finance documentation.

Development finance: cautious confidence, higher equity requirements

Development finance remains one of the more complex areas of the market in 2026. While confidence has improved, the sector continues to face headwinds, including high construction costs, historically low margins for contractors reducing available players in the market, regulatory change, labour shortages and slow planning processes. These factors are impacting viability assessments and elongating development timelines.

Loan-to-gross-development-value ratios are reflecting a more conservative approach from both banks and alternative lenders. Developers are typically required to contribute higher levels of equity and demonstrate strong track records, particularly on larger or mixed-use schemes.

From our perspective, careful structuring is critical. Lenders are placing greater emphasis on cost overrun protection, robust monitoring arrangements and step-in rights. For developers, early engagement on planning risk, building safety compliance and exit strategy is essential to securing funding on acceptable terms.

The growing role of alternative lenders and brokers

Non-bank and alternative lenders continue to gain market share in CRE and development finance, particularly where speed, flexibility and bespoke structuring are required. This shift is reshaping the competitive landscape, with increased competition for experienced originators and credit professionals.

While alternative lenders can offer attractive solutions, their documentation, pricing and risk appetite can differ significantly from traditional banks. Borrowers and sponsors must carefully assess covenant packages, pricing mechanics and enforcement provisions to ensure that flexibility at entry does not translate into unexpected constraints later in the life of the loan.

We have seen a rise in the number of finance brokers in the market, helping borrowers navigate the increasing complexity and availability of funding. It’s imperative that the right broker is engaged, who knows the market and can demystify the product to borrowers.

Sustainability

The overall market for sustainable finance continues to expand and interest remains strong. Financial institutions are increasingly offering ‘green’ and ’sustainability-linked’ instruments with a beneficial impact on pricing. Regulatory and policy frameworks are advancing, although there is a recurring challenge around standardisation and disclosure.

Concerns over greenwashing remain high. For some, this may be operationally challenging to implement as it requires building new capabilities, data collections, ESG risk assessment, reporting and compliance. However, ignoring ESG may lead to stranded assets or regulatory and reputational risk.

Regulatory and planning considerations

Planning reform, building safety legislation, the Renters’ Rights Act and evolving environmental standards continue to shape CRE and development finance. Compliance costs and delays must be factored into funding structures and lenders are increasingly focused on borrowers’ ability to navigate regulatory complexity.

Technology and data-driven lending

Technological innovations – especially AI and digital underwriting platforms – are reshaping the lending landscape by improving the speed, breadth and depth of credit evaluation, enhancing risk modelling capabilities and streamlining portfolio monitoring. The result is a more agile decision-making process, which is quicker for borrowers yet more reliable for lenders when assessing creditworthiness and cash flow at onboarding and throughout the term of the loan.

Balance of maturing facilities and acquisition finance

We’re likely to continue seeing significant refinancing and restructuring activity for debt that is maturing this year, with modified loan term requirements to avoid insolvency processes, especially where market values have not fully recovered. However, this will be balanced with a more even split with increased acquisitions as volumes recover and confidence strengthens on those more stable assets ready for acquisition.

A disciplined but constructive outlook

Overall, 2026 is shaping up to be another year of cautious optimism for CRE and development finance. Improved affordability and settling costs are supporting increased activity, but the market remains highly selective. Borrowers have increasing loan availability and greater ability to drive down pricing. Early engagement with lenders, prompt legal input and realistic assumptions are more important than ever.

For lenders, success will depend on disciplined underwriting, strong documentation and active asset management.

Those approaching the year with flexibility, transparency and a clear understanding of risk allocation will be best placed to take advantage of a market that is reopening – but on very different terms to the past.