How Rising Interest Rates Affect Commercial Property Refinancing

When interest rates rise, the cost of borrowing money goes up. That sounds simple enough, but in commercial real estate the consequences ripple through in ways that catch a lot of owners off guard. If you bought or refinanced a property three or four years ago when rates were low, your current loan terms might look nothing like what a lender would offer you today. And if that loan is coming due in 2025 or 2026, you are now facing a refinancing environment that is meaningfully more expensive than the one you started in.

Here is the core problem. The monthly debt payment on a new loan at today's rates may be substantially higher than it was on your original loan, even if the property itself has not changed. If the property does not generate enough income to comfortably cover that new payment, lenders will notice. They use a calculation called debt service coverage ratio, which compares the income a property produces to the amount owed on the loan each year. If that ratio falls below their threshold, which is typically around 1.25, getting the loan approved becomes difficult regardless of how long you have owned the property or how reliably your tenants have paid.

There is also a valuation issue. Lenders do not just lend against what you think your property is worth. They lend against what an appraiser says it is worth under current market conditions. When interest rates rise, property values often soften because buyers are willing to pay less for the same income stream. So an owner might approach a refinance expecting to pull equity out, only to find the appraised value has dropped and the lender will only approve a smaller loan than the one being replaced. That gap has to come from somewhere, and it usually comes out of the owner's pocket.

None of this means refinancing is impossible or that owning commercial property in a higher-rate environment is a mistake. It means decisions require more careful planning, more honest numbers, and more lead time than owners sometimes give them. The worst position to be in is discovering a problem thirty days before a loan matures. The best position is understanding your options a year or more in advance, when there is still room to adjust.

The refinancing stress accumulating across commercial real estate portfolios in 2026 is largely a product of the origination volume that occurred between 2019 and 2022, when capitalization rates compressed and loan-to-value ratios were underwritten against a historically low 10-year Treasury yield. Many of those loans, structured as five-year terms with floating or adjustable features, are now maturing into a rate environment where the all-in cost of debt has increased by 300 to 500 basis points. The result is a structural mismatch between the income a property was underwritten to produce and what it must now produce to satisfy current debt service requirements.

In the Charlotte MSA, this tension is particularly visible in the office and suburban retail segments, where net operating income growth has not kept pace with the rate environment. Industrial and well-located multifamily assets have shown more resilience, but even those property types are experiencing compression in cash-on-cash returns when existing debt is replaced at current spreads. A property that was acquired at a 5.5 percent cap rate with sub-4 percent debt might have produced positive leverage. At today's coupon rates, that same cap rate may produce negative leverage, meaning the cost of debt exceeds the unlevered yield on the asset. That is a fundamentally different risk profile than what was modeled at acquisition.

Lenders are applying tighter scrutiny to debt yield, often requiring a minimum of 8 to 9 percent, in addition to traditional DSCR thresholds. Debt yield is calculated as net operating income divided by the total loan amount, and it is lender-agnostic to interest rate movements, which is precisely why institutional lenders have weighted it more heavily in recent underwriting cycles. For borrowers seeking to refinance, this means the loan sizing conversation often begins with the income the property can support rather than the appraised value. In markets like Charlotte where rent growth has been real but uneven across submarkets, the property-level income story matters more than the macro narrative.

Owners facing a maturity default risk, which occurs when a loan cannot be repaid or refinanced at maturity, have several structural options worth evaluating in advance. Loan assumptions are increasingly valuable where existing below-market debt is assumable and a sale is being considered. Mezzanine financing or preferred equity can bridge a gap between what a senior lender will approve and what is needed to retire the existing note, though the cost of that capital is not trivial and the complexity demands experienced legal and financial counsel. Some borrowers are pursuing loan extensions or modifications with existing lenders, which can be a rational path when the lender's alternative is taking back a property in a soft disposition environment.

The honest assessment is that some assets purchased at peak valuations with aggressive leverage are facing a genuine reckoning in 2026 that no refinancing strategy will fully solve. Negative equity positions, where the outstanding loan balance exceeds the current appraised value, are not hypothetical in certain vintage years and asset classes. For those owners, the question shifts from how to refinance to whether holding, selling at a loss, or negotiating with the lender produces the least destructive outcome over a five to ten year horizon. That is not a conversation many people want to have, but it is often the most important one. The advisors and investors who navigate this cycle well will be the ones who ran honest numbers early rather than waiting for circumstances to force the issue.

For CCIM candidates and practicing brokers working with owner-clients in the Charlotte market, the refinancing environment in 2026 reinforces the importance of understanding the full capital stack at acquisition and underwriting conservatively through multiple rate scenarios. Sensitivity analysis on DSCR at 50 and 100 basis point rate movements is not a theoretical exercise; it is the kind of discipline that determines whether a client is positioned to weather a cycle or is forced to make decisions under duress. The advisor's value in this environment is not in finding easy answers but in helping clients see the full picture clearly enough to make decisions they will still respect years from now.