Real Estate · March 8, 2025 · 8 min read
Real estate financing in a higher-rate world
Cap rates have reset. Refinancing windows are tighter. Distress is starting to surface in the office stack. Here is how the smartest sponsors are operating in this cycle — and where we see the second-order effects landing.
The market has been adjusting to the new rate environment for almost three years. The first wave of distress has surfaced; the second is forming. The smart sponsors we work with are no longer in “wait for rates” mode — they have built strategies that assume the current cost of capital is, for practical purposes, the new normal.
The refinancing wall is real
Roughly $1.5T of US commercial real estate debt matures in 2025-2026. A meaningful portion of that was originated in 2020-2021 at coupons that no longer characterize the market. When those loans roll, the gap between the original underwriting and the new-money underwriting will, in many cases, simply not close.
That does not automatically mean foreclosure. It does mean negotiation: extensions in exchange for reserves, partial paydowns in exchange for rate relief, , and in the most distressed cases, deed-in-lieu transactions.
Office is where the math fails first
Class B office is the segment where the underwriting gap is widest. Where 2021 underwriting assumed 92% occupancy at 2019 rents, today's reality is 78% occupancy at rents 12-18% below 2019. Sponsors who paid 4% cap rates on those buildings are now looking at refinances that, even with rate relief, fail to clear basis.
What multifamily is doing
Multifamily looks healthier in the aggregate, but the dispersion has widened. Sun Belt markets that absorbed enormous supply in 2023-2024 are seeing concession-heavy lease-up and modest year-over-year rent declines. Coastal markets — particularly NYC and Boston — have continued to push rents and are facing different problems: insurance, taxes, and regulatory overhang.
For sponsors with multifamily debt rolling in 2025, the practical reality is that lenders are willing to work — but only with sponsors who come to the table with a thesis. A 75% LTV refinance in 2021 may need to become a 65% refinance in 2025, with the sponsor funding the gap. Lenders who see a clear plan are extending terms; lenders who see drift are pushing toward workout.
The capital that is showing up
Preferred equity and rescue capital
Pref equity originations into the recap stack have surged. The terms — 12-15% pay rate, accrued, with exit provisions tied to refi or sale — are aggressive but accepted in situations where the alternative is foreclosure. We have seen pref structures with equity warrants attached, which used to be unusual outside of distressed deals; now they are standard.
Patient strategic capital
Family offices and sovereigns are quietly buying. They are not bidding aggressively; they are sitting on the bid stack and acquiring when forced sales surface. The signal you want to watch is family-office direct origination of pref — when that volume picks up, the bottom is closer.
Workouts: what we have learned
Across the workouts we have run in the past 18 months, three patterns repeat:
1. Lender behavior is converging
In 2023, every special servicer had a different posture. By early 2025, the playbooks have aligned: extend if reserves are funded, modify if there is a credible business plan, push to deed-in-lieu if neither. Knowing which bucket you are in lets you prepare the right ask.
2. Junior debt holders are more aggressive than senior
Mezz lenders and pref equity holders are exercising rights more often. The senior is generally protected by basis; the junior is not, and is acting accordingly. If you are a sponsor with junior debt in your stack, do not assume parity of patience between seniors and juniors.
3. The 1031 window is narrowing
For sponsors looking to roll basis from impaired assets into stabilized ones, the windows are tightening because the supply of acceptable replacement property in the right basis range has thinned out. Plan further out than you would have in 2021.
What this means if you are operating
First: the workouts to come are not 2008 in scale or speed. The system has more equity cushion, the lenders are better capitalized, and the special servicers are more professional. But the path through is still painful for sponsors whose underwriting depended on rates returning to the 2021 baseline. Plan for the rates we have, not the rates we miss.
Second: the capital to bridge gaps exists, but the cost is real. If you can refinance at 65% LTV instead of 75% by funding the gap, the long-term math is almost always better than the alternative.
Third: when an asset truly does not pencil, the most expensive thing you can do is hold. We have seen sponsors burn through years of equity defending positions that, sold in early 2023, would have produced better outcomes than the deeds in lieu they ended up with in late 2024.