📉 Why Cap Rates No Longer Tell the Full Story in 2026 Commercial Real Estate
📉 Why Cap Rates No Longer Tell the Full Story in 2026 Commercial Real Estate
🏢 Cap Rates vs. Debt Yield vs. DSCR: How Lenders Are Really Underwriting Deals Now
Why Cap Rates No Longer Tell the Full Story
And what lenders are actually using to approve—or kill—deals like in 2025
For decades, cap rates were the go-to metric for valuing commercial real estate. They were simple, widely understood, and effective in a low-rate, stable credit environment.
That world no longer exists.
In today’s higher-for-longer rate environment, cap rates alone fail to capture financing risk, cash-flow durability, and lender tolerance. As a result, lenders are underwriting deals through a more layered lens—one that prioritizes debt yield, DSCR, and cap rate spread over headline pricing.
If you’re still anchoring decisions solely on cap rates, you’re underwriting yesterday’s market.
The Problem With Cap Rates in Today’s Market
Cap rates measure unlevered yield—not financing risk. They ignore:
Actual debt costs
Loan structure and amortization
Interest rate volatility
Cash flow sensitivity under stress
In a 3% interest-rate world, that didn’t matter much. In a 6.5%–8.5% debt market, it matters a lot.
This disconnect is why many “fairly priced” deals:
Don’t size
Fail lender DSCR tests
Require unexpected equity infusions
Or stall in credit committee
What Lenders Care About Now (2025 Underwriting Reality)
1. Cap Rate Spread (Not the Cap Rate Itself)
Lenders now focus on cap rate spread over the note rate, not the absolute cap rate.
Why it matters:
A narrow or negative spread signals refinancing risk and limited exit flexibility.
Typical lender comfort zones:
200–300 bps spread = strong
100–200 bps = cautious
<100 bps = credit stress
A 6.0% cap isn’t “good” if the loan prices at 7.25%.
2. Debt Yield (The New Credit Anchor)
Debt Yield = NOI Ă· Loan Amount
This metric answers one core lender question:
“If we had to take this property back, does the income justify the loan?”
Why lenders prefer it:
Ignores interest rates and amortization
Cannot be manipulated with leverage
Reflects true income support
Common 2025 targets:
Multifamily / Industrial: 8.5%–10%
Office / Specialty: 10%–12%+
Deals with strong debt yield still close—even when cap rates look “tight.”
3. DSCR (Cash Flow Margin for Error)
DSCR = NOI Ă· Annual Debt Service
DSCR determines:
Loan proceeds
Interest-only eligibility
Reserve requirements
Pricing adjustments
Typical lender minimums:
1.25x–1.35x stabilized
Higher for transitional or short-term debt
If DSCR fails, the deal restructures—or dies.
Why This Matters for Investors and Owners
Cap rates are still relevant—but they’re no longer decisive.
In 2026, capital markets discipline has shifted power to lenders, and underwriting now rewards:
Conservative leverage
Durable NOI
Clear exit paths
Realistic refinance assumptions
This is why experienced borrowers are:
Underwriting to debt yield first
Stress-testing DSCR
Using cap rate as a contextual metric—not the anchor
How a Mortgage Broker Adds Real Value Here
This is where most deals break—or get saved.
A strong mortgage broker:
Structures leverage around lender metrics, not broker assumptions
Matches assets to the right capital stack
Anticipates credit committee objections before submission
Aligns pricing expectations with executable debt
At Medallion Funds, our job isn’t to quote rates—it’s to engineer approvals in a tighter credit market.
Final Takeaway
Cap rates tell part of the story.
Debt yield, DSCR, and cap rate spread tell lenders whether the deal actually works.
If you’re underwriting like it’s 2019, you’ll keep getting last year’s rejections.
If you want deals to close, you need to think like the capital providing the money.
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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory
