The fastest repricing of commercial real estate in a generation did not punish leverage. It punished undisciplined leverage. The distinction matters, because it tells you exactly where the next set of returns will come from.
Underwrite the asset, then underwrite the capital stack
A deal that pencils at a 5.5% going-in cap with 75% leverage at 4% debt is a different security entirely when that same debt costs 7.5%. Too many sponsors underwrote the asset and inherited the capital stack. We do the opposite: we stress the financing first, then ask whether the asset can carry it.
Three tests we run on every deal before we look at the upside:
Debt service coverage at today's rate, not the rate on the term sheet you hope to get.
Refinance risk at the maturity wall — what does this look like if rates are flat for three more years?
Break-even occupancy, expressed as a percentage you could explain to a limited partner in one sentence.
Margin of safety is a number, not a feeling
Benjamin Graham's phrase gets quoted in real estate far more than it gets practiced. In our memos, margin of safety is the gap between the price we pay and a conservative estimate of intrinsic value — going-in yield versus replacement cost, in-place NOI versus pro forma, and the cushion in the debt.
When that gap is thin, we pass. The discipline to pass on a mediocre deal in a hot market is the same discipline that lets you move decisively when the market gives you a good one.
What this means for the next twelve months
Sellers who bought at peak pricing on short-term, floating-rate debt are the most likely source of mispriced opportunity. We are not predicting a crash; we are positioning for selective dislocation. The plan is simple: keep the underwriting standard constant and let the market come to it.
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We bring the same discipline you just read about to real mandates.