The DSCR Domino Effect: Why Commercial Math Isn't Penciling Out in 2026

[Priyanshu Adathakkar]

I’ve been talking to a lot of commercial real estate investors and underwriters lately, and there’s a recurring theme: closing CRE deals right now feels like running full-speed into a brick wall.

If you’re struggling to get your numbers to pencil out, you’re definitely not alone. It really comes down to one fundamental driver: The Cost of Money.

Think back just a few years ago—most of us were underwriting deals with interest rates comfortably in the 3% to 4% range. Fast forward to today, and conventional commercial loans are sitting anywhere between 4.9% and 8.7%+ (and if you’re looking at hospitality or short-term bridge debt, it’s even higher).

When your baseline borrowing costs essentially double, it kicks off what I call the DSCR Domino Effect:

1. Lenders Aren't Softening: You’d think banks might lower their safety margins to keep deal flow moving, but they aren't. Lenders are still firmly requiring a 1.25x Debt Service Coverage Ratio (DSCR) minimum.
2. Payment Shock: Higher interest rates drive up monthly debt service dramatically on the exact same purchase price.
3. The NOI Trap: Because debt service is so much higher and the 1.25x DSCR margin is non-negotiable, your Net Operating Income has to work twice as hard just to qualify for the loan.

This leaves buyers backed into a tough corner: you either have to project unrealistically higher day-one rents, or bring a massive amount of additional cash/equity to the table just to right-size the loan. Combine that with sellers who are still anchored to 2021–2022 valuations, and you get the current market gridlock.

So, how do we get around the traditional bank wall?

If we want to close deals today, standard bank debt often isn't going to cut it. We have to lean heavily into creative structuring:

• Seller Financing: Negotiating carryback debt at favorable rates to bridge the valuation gap.
• Subject-To / Loan Assumptions: Taking over existing low-rate agency or conventional debt that was locked in prior to the rate hikes.
• Strict Underwriting & Hyper-Targeted Selection: Buying only the specific asset types where value-add playbooks can rapidly push NOI to meet coverage requirements.

I’d love to hear from the rest of the forum:

What strategies are you using to bridge the gap right now? Are you finding success with seller financing, shifting your target asset class, or simply sitting on cash until cap rates adjust further?

Let’s discuss