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Do Community Banks Need to Rethink How They Refinance CRE?

The Refinancing Wall, the Equity Gap and a More Durable Capital Structure

By Dean P. Giglio | Managing Director, Stress Testing | CEIS Review Inc.

For several years, the commercial real estate discussion has centered on higher interest rates and the approaching refinancing wall. That wall is no longer approaching. For many CRE borrowers and lenders, refinancing risk is becoming a present-day credit issue. The important question is not simply whether a loan can refinance at today’s interest rates.

Can the underlying property support a normalized capital structure under today’s income, interest-rate and valuation environment and, if it cannot, who will provide the additional equity necessary to get it there?

Current Does Not Necessarily Mean Refinanceable

One danger in evaluating today’s CRE portfolios is placing too much reliance on contractual payment performance. A loan can remain current while the economics supporting its ultimate repayment have materially changed.

Refinancing capacity can contract materially when current debt-yield, DSCR and interest-rate requirements support less debt than the existing exposure. No delinquency is required for that problem to exist.

The property may remain occupied, the borrower may continue making every payment, and the guarantor may still report substantial net worth. Yet the existing capital structure is no longer supportable under current market conditions. That is refinancing risk before it becomes default risk.

A Refinancing Gap Is Not Necessarily a Credit Loss

A reduction in supportable refinance proceeds does not, by itself, establish principal impairment. Where collateral value and ownership equity remain sufficient, the shortfall may be resolved through an equity contribution, lower leverage, a sale or another restructuring of the capital stack.

The credit consequence changes when reduced refinancing capacity is accompanied by impaired collateral value and weaker net recovery. At that point, the issue has moved beyond the amount of debt the property can refinance and into potential loss severity and capital exposure.

The Refinancing Wall Is National. The Credit Consequences Are Segment-Specific.

CRE refinancing risk should not be treated as though it affects every property type uniformly. An outside-in assessment begins with the operating and capital characteristics of each segment, then applies geography as a second-level consideration. This approach better distinguishes broad segment pressure from risks driven by a particular market, submarket or loan vintage.

Recent market evidence reinforces that dispersion. Green Street’s September 2026 Commercial Property Price Index showed office values 33% below the 2022 peak and apartment values 22% below, compared with 8% for industrial and approximately flat pricing for strip retail. Moody’s 2026 structured-finance outlook expects slower growth and declining short-term rates to help some CRE borrowers refinance, while delinquency rates remain elevated. Together, those observations support a segment-first assessment without changing the central underwriting question: whether current property economics can support the existing debt and preserve sufficient collateral protection at refinancing. [5, 6]

Renewal or New Loan?

The more difficult loan requests are frequently centered around a bank’s own existing relationships, where years of satisfactory performance, sponsor history and institutional familiarity can make it harder to recognize that the underlying economics have changed.

That challenge becomes more pronounced at refinancing. A loan that was appropriately structured when originated may no longer be appropriately structured today. Where NOI, interest rates, collateral values and market underwriting standards have materially changed, the transaction should not be viewed as a routine renewal. It should be evaluated as a new loan decision involving an existing borrower and property. Recognizing that change is not an indictment of the original credit decision. It is an acknowledgment that the underlying economics and the capital structure required to support them have changed. That reassessment leads directly to the amount of debt the property can now support and the capital required to bridge any resulting shortfall.

Ultimately, Someone Has to Fill the Gap

There are only a handful of ways a refinancing imbalance corrects itself: NOI can increase, interest rates can decline sufficiently, the property can be sold, the lender can extend or restructure the credit, or new equity can enter the transaction.

An extension may provide time, but it does not necessarily correct the underlying economics. If the objective is to return the loan to a normalized structure supported by current property economics and market underwriting terms, additional equity is the most durable solution.

When Equity Will Not Fill the Gap

A conventional refinancing may not produce a return profile sufficient to attract the equity needed to close the gap. New equity is generally expected to absorb first-loss risk while earning a return commensurate with that position. Where most of the property’s available cash flow is required to service senior debt, the remaining economics may be insufficient to justify the required contribution, particularly when the new capital primarily protects the existing lender rather than creating a credible path to ownership value.

Where ownership will not provide the full cure and third-party equity cannot earn an adequate risk-adjusted return, an A/B tranche structure may provide a more workable bridge between current property economics and a normalized capital structure. The A tranche would represent the amount supportable under current NOI, debt-yield, DSCR and collateral constraints. The B tranche would isolate the unsupported portion of the existing exposure in a subordinate position, with repayment dependent upon future cash-flow recovery, amortization, asset appreciation, sale or another defined realization event.

The B tranche is not a substitute for true equity and should not be treated as though the refinancing gap has disappeared.

Its purpose is to recognize the portion of the debt that current economics can support separately from the portion that remains dependent upon future performance. Depending upon the circumstances, the B tranche may carry reduced or deferred current pay, accrued interest, cash-flow sweeps, performance triggers, contingent principal repayment or an equity-participation feature. The structure must preserve a credible incentive for ownership to contribute and remain engaged while avoiding a senior debt burden that the property cannot presently sustain.

Used appropriately, the structure can create time for recovery without obscuring the economic shortfall. Used without realistic valuation, enforceable controls and a defined exit path, it merely postpones loss recognition. The central underwriting question remains whether the combined structure offers a credible route to repayment and a better risk-adjusted recovery than foreclosure, sale or a conventional modification. [4]

Whether the solution is new equity, an A/B structure or another workout alternative, the analysis should move beyond delinquency and current payment status. A five-year comparison of property performance, NOI, debt yield, DSCR, supportable refinance proceeds, required equity and collateral recovery can help distinguish a temporary refinancing shortfall from a capital structure that is no longer sustainable. [4]

The Guarantor Dilemma

An A/B structure does not eliminate the need for ownership support. Traditional credit analysis emphasizes guarantor net worth and liquidity. Both remain important, but refinancing risk introduces a second and potentially decisive consideration: having the ability to contribute additional equity does not mean the guarantor will be willing to contribute it.

The ultimate constraint may not be guarantor capacity, but guarantor willingness.

The decision becomes increasingly economic as property values decline. Ownership will weigh the required new contribution against the remaining economic interest being protected. As the equity cure increases and remaining ownership equity decreases, the incentive to continue supporting the property can change rapidly.

This distinction is particularly important for sophisticated owners with multiple properties. Capital directed to an impaired asset cannot be deployed toward a stronger opportunity elsewhere. A lender therefore needs to distinguish ability to support from willingness to support. That distinction determines whether the refinancing gap can be cured with ownership capital or requires a different restructuring of the existing exposure.

The Durable Approach

Waiting for lower rates, extending maturities or relying on continued guarantor support may create time, but none of those outcomes alone resolves an unsupported capital structure.

The durable approach is to recognize the economics as they exist at refinancing: establish the debt the property can support, identify the capital required to bridge the difference and determine whether ownership has sufficient incentive to provide it. Where conventional financing cannot attract that equity, an A/B structure may offer a disciplined alternative by separating the sustainable senior exposure from the portion dependent upon future recovery.

The objective is not to preserve the appearance of a performing loan. It is to establish a credible path to repayment, maintain appropriate ownership participation and understand the lender’s recovery if the expected improvement does not occur.

The refinancing wall itself does not determine the loss. The critical issue is whether today’s property economics support the existing debt and, where they do not, whether ownership remains willing to provide the equity required to restore a sustainable capital structure.

The durable approach is to identify the sustainable debt level, quantify the equity cure, evaluate the owner’s economic incentive to provide that equity, and determine whether an A/B structure can improve the path to recovery without masking the unsupported portion of the exposure. The lender must also understand its potential recovery if ownership does not contribute and future performance does not materialize.

Selected sources support the market observations in the segment discussion. The credit analysis, geographic overlays, structuring observations and conclusions are those of CEIS Review Inc. Market conditions may change after the publication dates shown. This publication is intended for general informational purposes and does not constitute legal, accounting, investment or regulatory advice.

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DATA REFERENCES

[1] CBRE, “U.S. Real Estate Market Outlook 2026,” January 14, 2026. National sector outlook covering office, industrial, retail, multifamily and capital markets. https://www.cbre.com/insights/books/us-real-estate-market-outlook-2026

[2] JPMorgan Chase, “New York Multifamily Market Update,” May 18, 2026. Addresses New York rental demand, vacancy, rent regulation, expenses and higher-for-longer interest rates. https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/new-york-multifamily-market-outlook

[3] Fitch Ratings, “NYC Rent Freeze Pressures Rent-Stabilized Multifamily, Increasing CMBS Risk,” July 15, 2026. Addresses rent-stabilized revenue constraints, operating-cost growth, valuations and refinancing pressure. https://www.fitchratings.com/research/structured-finance/nyc-rent-freeze-pressures-rent-stabilized-multifamily-increasing-cmbs-risk-15-07-2026

[4] Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and National Credit Union Administration, “Policy Statement on Prudent Commercial Real Estate Loan Accommodations

and Workouts,” July 6, 2023, 88 FR 43115. https://www.federalregister.gov/documents/2023/07/06/2023-14247/policy-statement-on-prudent-commercial-real-estate-loan-accommodations-and-workouts

[5] Green Street, “Commercial Property Price Index,” September 4, 2026. Reports sector-level changes in U.S. commercial property values, including comparisons with the 2022 peak. https://info.greenstreet.com/hubfs/GSCPPI-20260904press.pdf

[6] Moody’s Ratings, “Global Structured Finance Outlook 2026,” December 16, 2025. Addresses CRE refinancing conditions, slower economic growth, declining short-term rates and continuing elevated delinquency. https://www.moodys.com/web/en/us/insights/credit-risk/outlooks/global-structured-finance-2026.html

This publication is intended for general informational purposes and does not constitute legal, accounting, investment or regulatory advice.