This paper documents a new externality stemming from the fear of fire sales: increased zombie lending during real estate price downturns. Firms use pledgeable assets such as real estate collateral to borrow. Using firm and syndicated loan data in the US, we confirm that the sensitivity of firms’ debt to real estate collateral is positive. However, this sensitivity falls during real estate price declines due to an increase in lending to low-quality firms despite a fall in real estate collateral value. Zombie credit to high collateral firms increases as lenders internalize the price externalities of liquidating real estate collateral. Zombie presence depresses investment and profitability of healthier firms. Our paper highlights a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.