Commercial Real Estate’s Great Capital Stack Reset

The commercial real estate industry has spent the last two years focused on the debt maturity wall.

The numbers are significant. Hundreds of billions of dollars in commercial and multifamily loans are scheduled to mature over the coming years. The prevailing question has been whether the industry can absorb that volume of refinancing.

I believe that’s the wrong question.

Debt maturities are not the story. Loans mature in every market cycle. 

What’s really happening is a market-wide capital stack reset.

For more than a decade, commercial real estate benefited from historically low interest rates, abundant liquidity and readily available financing. Assets were acquired, developed and refinanced in a capital markets environment where leverage was inexpensive and refinancing was often treated as routine.

Today, those assumptions no longer hold.

Interest rates have risen materially, financing costs have increased, and lenders are evaluating deals through a much different lens. As a result, many owners are discovering that capital structures built for a lower-rate environment no longer work today.

That doesn’t necessarily mean the underlying real estate is flawed. In fact, one of the most misunderstood aspects of the current market is that many assets facing refinancing pressure remain fundamentally healthy. They are occupied, generating revenue, and operating as intended. 

But occupancy doesn’t refinance a loan. Cash flow does.

And, across much of the market, property income has not increased enough to offset the higher cost of capital. As refinancing proceeds decline, borrowers are being forced to rethink structures that were built for a very different interest rate regime.

That’s why I view the current environment less as a debt crisis and more as a recapitalization cycle. 

Many multifamily assets illustrate the challenge. During the low-rate era, floating-rate loans and bridge financing became commonplace. Business plans were often built around assumptions of rent growth, operational improvements and future refinancing opportunities.

Then the market changed.

Today, owners are trying to refinance assets using financing assumptions that no longer exist. In many cases, achieving a successful refinance requires fresh equity, additional partners, lower leverage, asset sales or revised expectations around value.

The challenge is that much of the capital that would traditionally provide that equity remains tied up in older funds that have yet to fully realize investments made before and during the pandemic. Hold periods have been extended, exits have been delayed, and many investors are still waiting for capital to be returned from prior vintages.

As a result, the industry faces a growing mismatch between the amount of equity needed to refinance assets and the amount of equity available to do so.

That’s not a sign of market failure. It’s a sign that capital is being repriced.

What makes this cycle particularly interesting is that the industry has already spent several years trying to delay that reset. The phrase “extend and pretend” became popular because it accurately described what many lenders and borrowers were attempting to accomplish. Extensions bought valuable time, but they never solved the underlying issue.

Time can delay a maturity date. It cannot change the economics of a refinance.

Eventually, every extension expires, every loan matures, and every capital stack must stand on its own. That reality is likely to create a clear separation across the market.

The highest-quality assets should continue to attract capital. Well-located properties with strong fundamentals and disciplined underwriting will remain financeable, even in a more challenging environment.

The challenges will be greater for assets that relied heavily on leverage, aggressive underwriting assumptions, or perpetual access to inexpensive capital.

That’s how market cycles are supposed to work.

For years, abundant liquidity masked the distinction between exceptional assets and merely acceptable ones. As capital becomes more selective, those differences become increasingly apparent.

Importantly, this process should not be viewed exclusively through a negative lens. Periods of repricing create uncertainty, but they also create opportunity.

Some of the most attractive real estate investments emerge when capital markets are adjusting to a new reality. Strong assets can become available at more attractive valuations — not because they are fundamentally flawed, but because existing ownership groups cannot secure the equity needed to refinance them. 

As capital becomes more constrained, some assets will inevitably trade at discounts to their original basis, creating opportunities for investors with the liquidity and conviction to step in. New partnerships are formed. Portfolios are rebalanced. Capital flows toward the owners and operators best positioned to navigate the environment.

Every major real estate cycle creates winners and losers. The determining factor is rarely who predicted the cycle correctly. More often, it is who entered the cycle with the strongest balance sheet, the most disciplined underwriting, and the patience to act when opportunities emerge. 

The debt maturity wall may dominate today’s headlines. But I believe the more important story is what those maturities are revealing.

Commercial real estate is in the midst of a capital stack reset. Owners, lenders and investors are adapting to a higher cost of capital and a more disciplined financing environment. That adjustment will not always be easy, but it is a necessary part of the cycle.

The firms that successfully adapt won’t simply survive the reset. They will help define the next era of real estate investing.

Ari Rastegar is founder and CEO of Rastegar Property Company.