Private Credit Pressures, Commercial Real Estate and Regulatory Developments: Asset Management Risk Insights

Financial markets remained resilient during the third quarter of 2026 despite renewed inflation concerns, rising interest rates and geopolitical uncertainty. Continued investment in artificial intelligence (AI) supported equity markets, while private markets showed signs of recovery and commercial real estate faced persistent financing pressures.

This quarter’s Asset Management Risk Insights examines developments across public and private markets, regulatory proposals affecting investment advisers and retirement plans, commercial real estate trends and emerging sustainability risks. Together, these developments highlight the importance of disciplined risk management, valuation practices and regulatory oversight.

Market Update: Resilience Amid Rising Rates and Inflation

The third quarter of 2026 was characterized by stronger than expected economic growth, inflation concerns and rising interest rates. Markets remained resilient despite the Federal Reserve resumption of monetary tightening. AI-related capital spending remained a dominant investment theme, private markets showed signs of recovery and digital assets staged one of their strongest quarterly rebounds in years.

• Oil prices increased nearly 30% during the quarter amid supply disruptions and ongoing tensions involving Iran and concerns about shipping and energy flows through the Strait of Hormuz. Higher energy prices contributed to renewed inflation concerns, pressured bond markets and increased uncertainty regarding future Federal policy.
• During Q3 2026, the Federal Reserve raised the federal funds target rate by 25 basis points, citing inflation, higher energy prices and economic resilience. Interest rates increased significantly across the yield curve during the quarter, with the 10-year U.S. Treasury yield rising approximately 85 basis points to 5.29%.
• U.S. public equity markets delivered modest gains in Q3 2026, with the S&P 500 and Nasdaq Composite advancing approximately 2.0% and 2.5%, as strong corporate earnings and investment in AI supported large-cap technology stocks. Equity gains were concentrated in energy and technology stocks. Small-cap stocks declined and most other sectors faced pressure from higher borrowing costs and renewed inflation concerns.
• Private markets showed improvement, with private equity deal activity and exits rebounding as market conditions stabilized and sponsor confidence improved. Fundraising remained challenging and continued to concentrate among larger, established managers, reflecting ongoing investor selectivity.
• Digital assets experienced a strong recovery, reversing losses from the first half of the year. Bitcoin and Ethereum both showed significant gains, outperforming most asset classes. Institutional investment increased in spot cryptocurrency exchange-traded funds (ETF), along with activity in derivatives markets.
• Markets in Q4 2026 are expected to remain supported by solid economic growth and corporate earnings; however, investors continue to face interest rates, inflation, geopolitical risks and policy uncertainty due to the U.S. midterm elections.

Regulatory Update: SEC Proposals and Private Market Access

The SEC continued its shift toward regulatory modernization, reducing compliance burdens and expanding investor access to private markets. Significant proposals addressed political contributions, performance-based compensation and investment fund structures.

SEC examination priorities continue to emphasize fiduciary obligations, conflicts of interest, best execution, custody and compliance program effectiveness. Alternative investments, including private credit, remain areas of regulatory attention.

SEC Proposed Rule Changes

Elimination of pay-to-play rule

The proposal would eliminate Rule 206(4)-5, which restricts investment advisers from receiving compensation for advising government clients for two years following certain political contributions. The proposal would also eliminate associated recordkeeping requirements while retaining existing fiduciary duties, anti-fraud provisions and compliance obligations.

Modernization of electronic disclosures

The proposed Regulation E Delivery would permit electronic delivery to become the default method for certain required investor communications, including Form ADV brochures, fund reports, prospectuses and other regulatory disclosures.

Expanded retail access to private markets

The proposed changes would modernize interval fund requirements and expand multiple-share-class structures for certain closed-end funds and business development companies to facilitate broader retail investor participation in private market investments.

Elimination of federal shareholder proposal requirements

The proposal would eliminate Rule 14a-8, which establishes the federal framework allowing eligible shareholders to submit proposals for inclusion in public companies’ proxy materials. Under the proposal, shareholder proposal rights would instead be governed by applicable state law and corporate governing documents.

Continued Push to Open 401(k) Plans to Private Markets

In Q2 2026, the Department of Labor (DOL) proposed a fiduciary safe harbor intended to facilitate the inclusion of private market investments in 401(k) plans. The proposal has received numerous comments from across the financial industry.

In response, the SEC proposed additional reforms intended to expand individual investor access to private equity, private credit, real estate, and other alternative investments through regulated investment funds. The proposed reforms would:

• Modernize interval fund regulations by providing greater flexibility in repurchase frequency and liquidity management, potentially facilitating investments in less liquid private assets.
• Permit registered closed-end funds and business development companies to offer multiple share classes, expanding distribution opportunities and investment structures.
• Expand eligibility for performance-based investment adviser compensation, including broadening the qualified client definition to include accredited investors, subject to additional disclosure requirements.

These proposals complement the DOL initiative and could accelerate the development of investment products providing private market exposure to individual retirement investors. However, they remain subject to final rulemaking, and significant challenges involving liquidity, valuation, fees, transparency and fiduciary oversight remain.

Significantly, the SEC proposals do not directly modify ERISA requirements governing 401(k) plans.

Private Credit Market Pressures

Private credit markets experienced continued signs of stress during Q3 2026, as weakening borrower performance, valuation adjustments and investor redemption activity raised concerns about credit quality and liquidity.

• Credit deterioration continued among highly leveraged borrowers, particularly in technology and software. Reported valuations declined across certain business development company (BDC) portfolios, while nonaccruals, restructurings and payment-in-kind interest remained important indicators of borrower financial stress.
• Nonaccrual loans increased, with Kroll Bond Rating Agency (KBRA) reporting that median nonaccrual investments among certain BDCs rose to 2.75% of portfolio cost in Q2, compared with 1.81% in Q1 2026. These results, reported during Q3 2026, reflected increasing borrower financial stress.
• Higher interest rates increased borrowing costs for companies with floating rate debt, adding pressure to interest coverage ratios and refinancing capacity. However, higher rates also supported current income for private credit lenders whose borrowers continued to meet their obligations.
• Direct lending activity declined as competition from syndicated loan markets intensified. Approximately $16.4 billion of private credit loans were refinanced into syndicated markets during Q3 2026, increasing competitive pressure on private lenders and raising concerns about underwriting discipline and future returns.

These developments have increased scrutiny of private credit underwriting, borrower financial performance, portfolio valuations and liquidity management. The SEC staff issued a statement emphasizing existing fair value measurement and disclosure requirements for private assets, particularly private credit, with a focus on market inputs, valuation calibration, management judgment and transparent disclosures.

For institutional investors, the principal concern is whether reported valuations and investment returns adequately reflect emerging borrower credit deterioration, particularly as refinancing pressures increase.

Real Estate: Sector Bifurcation

Commercial real estate performance remains uneven across sectors, with improving demand in some markets offset by persistent credit pressures and growing development constraints.

Office: Vacancy is 19.8%, with a fifth straight quarter of positive absorption. However, gains are concentrated on high-value trophy properties and new developments, while Class B and C property values continue to erode.

Multifamily: Supply and demand are nearly balanced, with the narrowest gap between absorptions and completions since 2015. Securitized credit is at a cycle high as 2021-2022 bridge loans and expense growth compress net operating income.

Industrial: Demand reaccelerated, with a Q3 2026 net absorption of 76.6 million square feet, the strongest since Q1 2023, and anticipated record leasing of nearly one billion square feet.

Retail: Necessity and grocery-anchored centers remain resilient on limited new supply, low vacancies and reduced retail delinquency.

Data centers and alternatives: Demand remains the clearest growth story, but hurdles are mounting. Legislation and community opposition have become significant constraints with Texas, New York, Michigan, Georgia and other states implementing moratoriums or bans on new facilities. Estimates indicate that projects worth $130 billion were stopped or delayed in Q1 2026 alone.

Real Estate: Capital Markets

The U.S.-Iran conflict pushed inflation above 4% by midyear and stalled rate cuts. The Federal Reserve raised the target range to 3.75%-4.00%, with another increase anticipated by year-end.

Recent market developments no longer support expectations of five to 15 basis points of cap rate compression. Net lease cap rates increased 10 basis points to their highest level in more than a decade. Private market valuations continued to lag market indicators.

Transaction volume reached $483 billion through August, an increase of 53% year over year with large entity-level transactions contributing significantly to the increase. Excluding mergers and acquisitions, August single-asset transaction volume declined approximately 21% year-over-year.

Refinancing pressures remain significant, with estimates that approximately $1 trillion of commercial real estate debt is potentially troubled. Alternative lenders accounted for 38% of nonagency closings, and CMBS delinquency increased to 8.02% in September, its highest level since November 2020.

Multifamily delinquency reached 8.04%, slightly above the overall rate, while office delinquency stood at 12.16%. Collateralized Loan Obligation (CLO) distress increased from 19% to 28% in August.

Nonperforming loans with matured balloon payments accounted for 81% of newly delinquent balances, highlighting the limitations of loan extensions in addressing refinancing challenges.

Sustainability and Climate

Insurance

Property insurance pricing for large accounts declined as additional capacity and insurer competition improved market conditions, including for catastrophe-exposed properties in Q2. Insured catastrophe losses totaled approximately $42 billion in the first half of 2026, the lowest first-half level since 2020.

Building performance standards

Initial compliance results under New York City’s Local Law 97 were stronger than projected for the 2024 emissions limits. Compliance pressures are expected to increase as the city pursues a 40% emissions reduction, with estimates showing only 43% of buildings currently meet the 2030 limits. Boston extended the compliance dates for its building performance standards program.

Q3 2026 Outlook: Balancing Market Resilience and Emerging Risks

Financial markets demonstrated resilience during the third quarter, but asset managers continue to face challenges from higher interest rates, inflation concerns and uneven performance across asset classes. Private credit pressures, commercial real estate refinancing challenges and evolving regulatory proposals underscore the importance of disciplined investment practices and effective risk management.

As firms look toward year-end, maintaining strong governance, transparent valuation practices and effective compliance programs will remain essential. Contact us to discuss how these developments may affect your organization.

©2026

Featured

Asset Management Markets, Commercial Real Estate and Regulatory Update: Asset Management Risk InsightsRead Article

 

Article

Asset Management Markets, Commercial Real Estate and Regulatory Update: Asset Management Risk Insights