Developers Dealing With Unpredictable Refinance Risk

The commercial real estate market has always been cyclical, but the current lending environment is testing even the most seasoned developers. What once felt like a straightforward refinance process now carries a new level of uncertainty. Interest rate volatility, tighter credit standards, and shifting asset valuations have reshaped the refinancing landscape, leaving many projects at risk of falling short of original pro formas.

Developers who built their capital stack assumptions on yesterday’s lending conditions are now finding that today’s market looks very different. Takeout loans that would have been easily placed two years ago are now facing much more conservative underwriting. This shift is not temporary noise in the system; it is the result of fundamental changes in how lenders are assessing risk.

Why Refinancing Has Become Less Predictable

There are three main forces behind the current unpredictability.

First, interest rate volatility has introduced a moving target into every refinance discussion. A rate that looks favorable during early negotiations can shift upward before closing, changing the economics of the deal. This makes timing a critical factor and reduces the reliability of rate locks, especially on longer execution timelines.

Second, asset valuations have adjusted downward in many markets. Even strong properties are seeing appraisals come in below expectations as capitalization rates expand and transaction volumes slow. Lower valuations can translate into smaller loan proceeds, creating potential funding gaps that must be filled with additional equity.

Third, credit conditions have tightened across the board. Banks and institutional lenders have adopted more conservative standards, often requiring higher minimum Debt Service Coverage Ratios (DSCR) and showing less tolerance for aggressive rent growth assumptions. Lenders want to see stability in cash flow, stronger tenant quality, and more realistic market projections before committing to a refinance.

This combination means that a developer who counted on refinancing into a certain loan amount at a specific rate could now find those assumptions off by a wide margin. For highly leveraged projects, this can make the difference between a smooth exit and a scramble for new capital.

Stress-Testing Your Exit

In this climate, it is essential to look ahead and prepare for a more conservative financing outcome. A smart starting point is to stress-test your refinance assumptions using higher interest rates and stricter DSCR requirements.

Run your numbers at 6% to 8% interest rates and see if the deal still works. If the project cannot support the debt at those levels, that is a signal to adjust your capital structure now rather than waiting for the refinance window to open.

Also test different DSCR scenarios. If a lender requires 1.35 or 1.40 instead of the 1.25 you originally modeled, how does that affect the loan amount? The earlier you uncover potential shortfalls, the more options you will have to address them.

Keeping Leverage Conservative on the Front End

While it may be tempting to maximize leverage at acquisition or during construction financing, today’s conditions call for restraint. Higher leverage might improve early-stage returns on paper, but it also creates vulnerability when it comes time to refinance.

Bringing in more equity upfront may not feel ideal, but it can provide a critical cushion when the refinance market is tight. Conservative leverage also improves the DSCR from day one, which can help qualify for better loan terms later and reduce the risk of a last-minute capital scramble.

Developers who position themselves with lower leverage and stronger cash flow are better able to weather valuation adjustments, rate increases, and lender conservatism. In uncertain markets, liquidity and flexibility often matter more than squeezing out maximum early returns.

Building Relationships with Non-Bank Lenders

In this environment, traditional bank financing is not the only path forward. Non-bank lenders, such as debt funds, private credit providers, and life insurance companies, are playing a larger role in refinance scenarios. These lenders often have more flexibility in structuring deals, allowing for creative payoffs, capital resets, or staged financing that can bridge a gap until permanent financing becomes viable.

Developers should not wait until a refinance is imminent to build these relationships. Cultivating connections with a range of lending partners now can provide valuable alternatives later. Even if your first choice is a traditional bank, having established dialogue with non-bank lenders gives you negotiating leverage and a safety net.

Some non-bank lenders are willing to tailor structures that match a project’s specific challenges, such as delayed lease-up, tenant rollover risk, or higher-than-expected operating expenses. These tailored solutions can buy the time needed for the property to stabilize and achieve the metrics required for long-term financing.

Adapting to the New Normal

It is important to recognize that the lending market you are working in today is not an aberration, it is a reflection of broader economic and financial realities. While rates and credit standards will shift over time, it is unlikely we will see a return to the ultra-low rate environment and aggressive underwriting of the last decade anytime soon.

Developers who acknowledge and adapt to this new normal will be better positioned than those who keep modeling based on outdated assumptions. This means adopting a more conservative stance on leverage, being realistic about rent growth, and maintaining open communication with multiple lending sources.

It also means embedding refinance risk management into the project lifecycle, rather than treating it as a final step. Underwriting, design, lease-up strategy, and even tenant mix decisions can all influence how a property will perform under future refinance scrutiny.

The Takeaway

In today’s commercial real estate market, refinancing is no longer a straightforward step in the process—it is a potential choke point that can disrupt even the best-planned projects. By stress-testing your exit, keeping leverage conservative, and expanding your network of lending partners, you can reduce the risk of being caught off guard.

The developers who will succeed in this cycle are not the ones who assume everything will go according to plan. They are the ones who prepare for multiple outcomes, build resilience into their capital structures, and remain proactive in managing lender relationships.

The market has changed, and refinancing has changed with it. Meeting that reality head-on is not just prudent—it is essential for protecting your returns and keeping your projects on track.