View article in Colorado Real Estate Journal.
Extended rate cycles have a way of exposing structural weaknesses that inexpensive capital once concealed. Over the past two years, commercial real estate owners, developers, and investors have operated in a market where straightforward transactions have become increasingly rare. Refinances that cleanly neutralize existing debt, acquisitions that fit conventional bank parameters, and development deals that pencil from a pro forma alone are now the exception rather than the norm.
What has emerged is a far more demanding advisory environment. Today, structuring matters as much as sourcing, and achieving the right capital outcome requires command of the full capital stack rather than reliance on a handful of familiar lending relationships.
Refinancing Without the Old Math
Owners who financed assets between 2018 and 2021 are confronting a difficult reality. Underwriting the same property at today’s rates frequently produces debt service coverage ratios that reduce loan proceeds below the current loan balance. Cash out refinances that once felt routine have become increasingly difficult to execute and the permanent debt market simply does not always support a clean refinance.
As a result, we have helped clients navigate the more creative structures to bridge the gap between what senior debt will support and what is required to retire existing obligations. Preferred equity and mezzanine debt have become common tools in recapitalizations. In select cases, ground lease structures have been effective in separating land from improvements to unlock capital unavailable through conventional refinancing. Retroactive C-PACE financing has also become part of more conversations on qualifying assets, helping sponsors reduce required equity injections and, in some cases, generate meaningful proceeds alongside a senior loan placement.
None of these structures are frictionless. Each introduces additional complexity and requires sponsors willing to navigate a more involved process. However, for owners facing looming maturities without a clean refinancing solution, the alternatives are often far less attractive. The operators who navigated this environment most effectively remained open to structures they hadn’t previously considered.
Acquisitions and the Shift Toward Bridge Capital
On the acquisition side, traditional lender appetite for holdbacks and earnouts tied to lease up or performance milestones has narrowed considerably. These structures were more common in an environment where both lenders and borrowers had greater margin for timing risk. Today, most banks or life insurance companies are underwriting to in-place cash flow with far less tolerance for projected future income. As a result, acquisitions involving vacancy, near term lease rollover, or value-add plans increasingly require bridge financing from debt funds rather than conventional permanent capital.
This shift has not been entirely negative. With traditional capital pulling back, debt funds have raised additional capital to meet demand and competition among bridge lenders has compressed spreads. The gap in pricing between permanent and bridge debt has narrowed significantly. With treasuries increasing this year and SOFR proving more stable, bridge financing has become more attractive, while offering the ability to underwrite to higher LTV and proforma NOI.
Sponsors must now make an earlier and more realistic assessment of which lender category a transaction truly fits. The deal may still be financeable, but through bridge capital, with a clearly defined path to permanent financing.
Development and the Equity Gap
Development has experienced the most significant structural shift of all. Traditional LP equity, particularly institutional and high-net-worth capital that funded much of the prior cycle’s ground-up activity, has not simply repriced. In many cases, it has moved to the sidelines altogether. The return thresholds that once made commercial real estate development attractive are difficult to achieve in a market defined by elevated debt costs and uncertain exit cap rates.
The capital challenge is compounded by persistently high construction costs, limited comparable sales in many markets, and lender scrutiny of valuations that comps do not always support. For developers still pursuing new projects, creativity is no longer optional.
Preferred equity has stepped into part of the void, often from the same investor base that previously operated as traditional LP equity but has migrated lower in the capital stack in pursuit of stronger risk-adjusted returns. Debt funds have become the dominant non-bank capital source in development finance. For many projects, the capital stack now looks fundamentally different – senior construction loans paired with preferred equity to bridge financing gaps, or stretch senior financing from debt funds with larger sponsor contributions filling the remaining equity requirement.
The result has been a materially slower development pipeline. There are fewer cranes in the air, fewer projects breaking ground, and fewer planned deliveries over the coming years. These are meaningful implications for future space availability across multiple asset classes.
What This Environment Requires
The common thread across refinances, acquisitions, and development is that today’s market demands deeper underwriting and a broader advisory perspective than most transactions required just a few years ago. Deals are not closing because conditions are easy. They are closing because the structure is right and the capital sources are appropriately aligned with the business plan.
The sponsors performing best throughout this cycle engaged early, presented the full picture of the transaction, and remained flexible in considering structures that may have initially felt unfamiliar. More than any individual market shift, that discipline has been the defining factor separating transactions that closed from those that did not.