Why Stress-Testing Has Become the First Line of Defense
In 2025, a lender’s “yes” doesn’t come easy. With sustained high interest rates, tighter liquidity, and the refinancing wall of 2026 looming large, credit committees are no longer just underwriting to the base case—they’re building in fire drills.
A $15M multifamily deal that might have flown through in 2021 now hits a wall when the underwriter shocks rates +150 bps and the DSCR craters. The assumptions borrowers used to lean on—cap rate compression, year-one rent growth, bridge-to-perm exits—are now liabilities unless proven otherwise.
Welcome to the era of aggressive stress-testing. Here’s how the underwriting sausage is made.
What Is Stress-Testing in CRE Underwriting?
Stress-testing in commercial real estate underwriting is the process of modeling adverse scenarios to evaluate whether a deal remains solvent under pressure. While the base case represents the borrower’s projected performance, lenders apply downside assumptions across three critical areas:
- DSCR and debt yield deterioration
- Liquidity and reserve sufficiency
- Refinance risk based on exit assumptions
Stress-testing answers the question: If things don’t go as planned, can this loan survive without default?
The Three Stress-Test Pillars
- DSCR Under Rate Shocks
At the heart of nearly every lender’s underwriting model is debt service coverage ratio (DSCR)—a measure of net operating income (NOI) relative to loan payments. Most lenders require a minimum 1.20x DSCR at underwriting, but the real analysis begins when they apply rate shocks.
Typical stress tests in 2025:
- +100–150 bps interest rate increase
- Flat or declining NOI growth over the first 12 months
- No refinance within 18 months (for bridge deals)
Loan Amount
Interest Rate
Amortization
Annual Debt Service
In-Place NOI
DSCR
Base Case
$10,000,000
7.25%
IO
$725,000
$1,000,000
1.38x
Stress Case
$10,000,000
8.75%
IO
$875,000
$950,000
1.09x
Conclusion: A DSCR below 1.20x under stress will often result in a lower loan amount—or a request for more reserves.
- Operating Reserves: Your First Line of Defense
Lenders are beefing up reserve requirements in 2025 across:
- Interest Reserves: Typically 6–12 months for non-stabilized assets or transitional deals.
- Operating Deficit Reserves: Especially for lease-up, hospitality, or assets with known rollover risk.
- CapEx Reserves: For any business plan involving repositioning or deferred maintenance.
Development and value-add loans are especially scrutinized for:
- Escalating construction costs
- Delayed permitting
- Slower-than-expected lease-up
“Today’s market rewards borrowers who over-capitalize the balance sheet, not those who run lean,” says Lev Capital.
- Exit Strategy & Refinance Risk
For shorter-term bridge or construction loans, the refinance viability is now stress-tested against:
- Future DSCR on stabilized NOI
- Exit cap rates +50–100 bps
- Interest rates at today’s (or higher) levels
- Minimum 1.25x exit DSCR
Common red flags:
- NOI projections with >10% CAGR
- No backup exit beyond refinancing
- Relying on aggressive appraisal assumptions
As Blooma puts it: “If the refi isn’t penciling at today’s cap rates and interest rates, it’s not a bankable exit.”
Stress Thresholds by Asset Class
Not all properties are stressed the same way. Here’s how thresholds and sensitivities shift by property type:
Multifamily
- GSEs (Fannie/Freddie): Require 1.25x DSCR minimum with mandatory underwriting stress at +100 bps per their Multifamily Underwriting Standards.
- Private lenders: Often allow IO periods, but underwrite to amortizing schedules and require interest reserves through stabilization.
- Key Stress Areas: Rent roll quality, tax increases, insurance hikes.
Office
- Underwriting lease roll assumptions very conservatively
- DSCR must hold even with partial renewals or soft market conditions
- No credit given for speculative lease-up beyond 12 months
FNRP notes that for office: “Every vacant floor is a strike. A half-empty building must be modeled to stay that way for a while.”
Hospitality
- Highly sensitive to RevPAR volatility and seasonal cash flows
- Stress tests model:
- 15–20% RevPAR declines
- 6-month operating deficits
- Exit cap rates +150 bps
- Franchise flags and management fees heavily scrutinized
Industrial
- Most stable in base underwriting, but lenders are now stress-testing:
- Rollover exposure: Are your tenants long-term or at year 3 of a 5-year lease?
- Cap rate decompression: No longer assuming 4.5% exits—now using 5.5–6.0%
- Spec development risk: Pre-leasing is increasingly mandatory
Industry Sources & Guidance
If you want a more in depth analysis of each of these points please check out:
Final Takeaways: How to Reverse-Engineer a “Yes” in 2025
- Model Your Own DSCR at +150 bps. If you fall below 1.20x, revise the business plan or reduce leverage.
- Expect Reserve Requirements. Come prepared with interest, operating, and CapEx reserves—especially on transitional deals.
- Stress Your Exit. Make sure your projected DSCR holds at a 6.5% rate and a 100 bps wider cap rate. If not, it’s time for more equity.
- Tailor to Asset Class. Know what stress sensitivities apply to your deal type—and get ahead of them in your loan package.
- Present the Stress-Case Story. Borrowers who acknowledge risks and preemptively mitigate them win trust and term sheets.
In 2025, it’s not about telling the best story—it’s about telling the most resilient one.
If you’re currently running the numbers on a new deal, we can help. With over 700 CRE lenders in our Rolodex we have options to suit a variety of scenarios. You can schedule a call by clicking here, or reaching out directly here. Also, please be sure to check out our other articles for more helpful information here.