Part 4/7:
The heart of the issue lies in the relationship between interest rates and property values. Historically, commercial real estate valuations are directly linked to cash flow rather than comparative sales data, unlike residential properties. With lenders demanding a debt service coverage ratio (DSCR) that dictates how much income supports the debt, many commercial properties may no longer meet the required ratios due to the spike in interest rates.
The dilemma is straightforward: if a property’s cash flows remain the same, while its debt service increases, its valuation will subsequently plummet. This phenomenon could lead to widespread asset write-downs, with potential losses reaching $52 million on properties that were initially valued at $130 million.