Developers - Navigating Shifting Underwriting Criteria
In today’s real estate market, one constant is change. Nowhere is that more evident than in the underwriting criteria used by lenders. What passed for acceptable leverage, asset exposure, or borrower profile just 12 months ago may now fall outside the bounds of a lender’s revised risk appetite. For developers and investors, these fluctuations are more than just hurdles – they are signals. When interpreted correctly, they point to moments of opportunity.
Lenders operate with a forward-looking lens, constantly recalibrating their appetite based on economic signals, sector performance, and liquidity conditions. A lender that last year aggressively financed 75 percent loan-to-cost on a hospitality redevelopment may now hesitate to go above 60 percent – or may exit the sector altogether. These changes can leave borrowers stranded mid-process, or worse, mid-project. Understanding why these shifts occur and how to respond can give developers a distinct edge.
The Reality of a Moving Target
Underwriting is not a fixed science. It is shaped by interest rate movements, capital market volatility, macroeconomic uncertainty, and regulatory pressure. As those variables evolve, lending parameters follow suit.
Loan-to-cost ratios, once generous, are being trimmed. Debt service coverage ratios are being stressed under higher interest assumptions. Borrower liquidity requirements, sponsor experience thresholds, and pre-leasing minimums are all under tighter scrutiny.
Asset class preferences have also shifted. Sectors once viewed as stable – office, suburban retail, even certain hospitality assets, are now viewed through a more cautious lens. Meanwhile, industrial, multifamily, and specialty housing continue to attract lender interest, but even there, underwriting has become more selective.
What this means for developers is simple. The lender that issued a term sheet six months ago may no longer be willing – or able, to honor it. Bridge lenders may reduce loan proceeds. Banks may delay closings under the guise of additional diligence. Institutional capital sources may shift internal allocations, leaving funding gaps in previously approved pipelines.
From Friction to Opportunity
This is where opportunity presents itself. When a lender pulls back or changes terms mid-cycle, it creates a disruption. That disruption, while frustrating for the borrower, opens the door for other capital providers, and for well-positioned developers and investors to step in.
Developers who understand this dynamic can position themselves to either renegotiate terms on more favorable footing or step in to take over projects where the original borrower can no longer meet revised loan conditions. For investors, it becomes a chance to enter a deal at a more attractive basis, with updated underwriting and improved risk-adjusted returns.
These moments often arise quickly. A stalled loan process, an expiring rate lock, or a sponsor under pressure from rising carry costs may create urgency. When traditional capital retreats, private lenders, funds, and opportunistic investors who can move swiftly and underwrite based on today’s conditions, not yesterday’s assumptions, gain significant leverage.
The Advantage of Flexibility
In uncertain lending climates, flexibility becomes a key advantage. Developers and investors who work with capital partners willing to tailor structures – shorter terms, higher reserves, preferred equity positions, or creative recourse strategies, can move on deals others can’t close.
This flexibility is not just financial. It’s also operational. Lenders that can evaluate sponsor credibility, project viability, and asset fundamentals in real-time, rather than against a rigid checklist, are the ones who will continue to transact.
For developers, aligning with such partners ensures continuity. It avoids delays, re-underwriting cycles, and the reputational damage that can follow a failed close. For investors, it creates access to situations where pricing reflects dislocation, not long-term fundamentals.
Preparing for the Unexpected
To take advantage of these moments, preparation is essential. Developers should maintain up-to-date project documentation, financials, and pro formas. Anticipate the questions a new lender will ask, and be ready with answers that reflect current market realities, not outdated assumptions.
Investors looking to deploy capital into disrupted deals should maintain close relationships with brokers, lenders, and legal advisors who are first to hear when a financing hits a snag. The sooner the information reaches the right hands, the greater the chance of stepping in ahead of a broader market response.
Also critical is the ability to underwrite dynamically. Projects that made sense at 70 percent LTC and a 4.5 percent interest rate must now be evaluated at 60 percent LTC and a rate north of 7 percent. If the deal still works, or can be restructured to work, that’s a sign of real durability.
Seizing the Window
In every cycle, there are moments when traditional capital retrenches. Those windows can be narrow, but they are often the most rewarding. The current market, with its evolving underwriting standards and tighter capital conditions, is full of such moments.
For developers, it’s a time to sharpen proposals, stress-test assumptions, and build relationships with lenders who can see beyond the latest headline. For investors, it’s a time to pursue quality projects that need capital, not because they are flawed, but because their previous lenders changed the rules mid-game.
Disruption is often viewed as a challenge, but for those who understand the mechanics of capital and the psychology of lenders, it is a signal. When underwriting changes, the right response is not to pause. It’s to lean in, assess quickly, and act decisively. In doing so, developers and investors can turn market friction into strategic advantage.