The market is no longer frozen the way it was during the sharpest part of the rate shock: in fact, the federal funds target range upper limit stood at 3.75% as of May 2026.
However, this ‘lower’ rate is still high enough to affect how much CRE lenders will advance and how easily CRE borrowers can refinance.
This is important because interest rates can affect a CRE deal’s viability fundamentally:
Interest rates can affect a CRE deal’s viability fundamentally
Effect on debt service
If your loan floats with SOFR, your interest expense can rise quickly and leave you with less cash after operating expenses and debt service.
Effect on refinancing
Many CRE loans maturing in the next several years were underwritten when average rates were near 3.9%, nowhere near the current 5.5% to 12.5%.
At this higher cost, the same property income may no longer cover the loan comfortably, even if occupancy remains stable.
Effect on property values
If safer non-CRE investments pay more, buyers need a higher return to justify taking on CRE risk at all.
That usually means buyers pay less for the same income.
Unless you can raise NOI enough to make up the difference, your property’s value can fall.
What can you do to protect your deals as rates swing?
Whether rates will rise or fall next shouldn’t be your main underwriting concern.
The bigger-picture question to ask is whether the property will still be viable if the debt ends up costing more than expected.
1. Test debt coverage before you size the loan.
Run the property through today’s rate first. Then test a higher borrowing cost and a delayed refinance.
The goal is to see how much room the asset has before DSCR falls below the lender’s requirement.
If the deal only works after assuming lower rates or stronger rent growth, the margin is too thin.
Tighten the loan amount before you go any further.
Your underwriting model should answer one question clearly: how long can the property carry its debt if rates stay higher than expected?
Don’t size the deal around the maximum loan amount.
Lower proceeds can be frustrating, but more conservative leverage may protect the asset if income growth slows or refinancing costs stay elevated.
2. Match the debt type to your business plan.
Choose fixed-rate debt if the property already has stable income and you plan to hold it for several years.
Use floating-rate debt only if your business plan needs to be flexible, such as if it’s a short-term value-add deal.
Run the downside case before choosing floating debt: ask how much cash flow will remain if the floating rate stays high for another year.
If the property can’t absorb that cost, build in a rate cap or reduce the loan amount before closing.
3. Set a ceiling on floating-rate debt.
If you do decide to use floating-rate debt, don’t wait until closing to decide whether you need a cap or swap.
Decide this while you are comparing loan terms, because the hedge cost affects the true cost of the debt.
Use an interest rate cap if you want to limit your exposure above a certain rate but still want to benefit if rates fall.
Price the cap before you finalize the loan so that the premium doesn’t surprise you at closing.
Consider a swap if what you need is a more predictable payment, such as if the property has a stable income but needs debt service to stay within a narrow range to stay cash-flow positive.
Before signing any hedge, check (1) how long the hedge lasts and (2) what it costs to exit early.
Does your plan include selling or refinancing before maturity? Breakage costs can affect your return.
4. Test your refinancing capacity before the loan comes due.
Ask lenders what the property could qualify for at current rates well before the loan matures, then compare that number with the existing debt balance.
Will the new loan come in lower?
Decide how you will cover the shortfall well before the deadline so that you don’t limit your options.
You may need to bring in new equity or negotiate an extension.
It’s easier to make that call when you’re not pressured by a maturity date closing in fast.
Refinancing should be relegated to an end-of-loan task.
The earlier you know the likely proceeds, the more control you have over the outcome.
5. Use conservative exit assumptions.
CRE investment activity in the US should rise by around 16% this year, but that doesn’t necessarily mean that pricing will return to the ultra-low-rate years.
So always test your acquisition model with a higher exit cap rate than your preferred case, and then check whether the return will still work if the sale takes longer than expected.
6. Choose durable-income CRE sectors.
Certain CRE sectors tend to perform better in a higher-rate market:
- Date centers
- Healthcare real estate
- Grocery-anchored retail
Be more careful with older office buildings. They often need more capital and may be harder to refinance.
7. Build reserves.
Your reserve plan should cover/account for:
- Debt service if income drops
- Tenant improvements
- Leasing commissions
- Rate cap renewals
- Insurance increases.
8. Prepare your file the way lenders review it.
One of the most important skills you can develop as a CRE investor is to look at the deal the way a lender will.
- Clean up the rent roll and operating statements before you ask for financing.
- Prepare lease abstracts and a capital plan.
- Show how the property earns income and where near-term risk could affect repayment.
- Explain the property’s DSCR and debt yield.
- Show how the property earns and which upcoming costs could reduce the cash available for debt service.
- Indicate which leases will expire during the loan term and show how much rent is at risk. Also, list any major repairs or upgrades you plan to do during the loan term and show how you will pay for them.
- Show how much cash you have available if leasing takes longer than planned.
Don’t make the lender guess. Having everything in order can make the loan discussion faster and put you in a stronger position during term negotiations.
Bring the file to Private Capital Investors. Call 972-865-6206 or fill out this CRE loan request form.
Other sources
- https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/hedging-interest-rates-in-commercial-real-estate
- https://fred.stlouisfed.org/series/DFEDTARU
- current rates: https://www.nerdwallet.com/business/loans/learn/commercial-real-estate-loan-rates
- https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/commercial-real-estate-outlook.html
- https://www.cbre.com/insights/books/us-real-estate-market-outlook-2026
- https://www.jll.com/en-us/guides/exploring-the-best-hedging-tools-for-private-investors
