Navigating Higher Interest Rates in Commercial Real Estate

Strategies for Refinancing in a High-Interest Rate Environment

Higher interest rates are here, and commercial real estate (CRE) investors are feeling the squeeze. With central banks raising rates to curb inflation, the cost of refinancing loans has surged, cutting into cash flow and profitability. But there are ways to navigate this challenging environment.

Here are some key strategies for investors facing higher borrowing costs:

1. Optimize Your Loan Structure: Before refinancing, explore fixed-rate loans or hybrid products. Fixed rates offer long-term security against future rate hikes. If rates drop later, you can always consider refinancing again.

2. Revisit Your DSCR: Lenders are tightening their requirements, so your Debt Service Coverage Ratio (DSCR) needs to be solid. A DSCR measures whether your property’s income can comfortably cover the debt. Increasing your property’s income through rent adjustments or cost reductions can help.

3. Consider Alternative Lenders: Traditional banks may no longer be your best option. Private lenders, credit unions, or non-bank financial institutions often offer more flexible terms in volatile markets.

4. Explore Interest Rate Caps: If you’re considering a floating-rate loan, an interest rate cap can provide protection against runaway rates. It gives you the flexibility of lower payments if rates drop but caps your exposure if rates rise further.

While refinancing may not be as straightforward as it once was, with careful planning and creative solutions, you can still find opportunities in today’s market.

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