What If Rates Don't Come Down?
Most portfolios were built for a world that might not come back
Everyone’s waiting for rates to drop.
The whole industry is holding its breath. Sponsors. LPs. Lenders. Brokers. All sitting on the same assumption: this is temporary. Relief is coming. Just hold on a little longer.
But what if they don’t drop? What if “higher for longer” means 2027, 2028, or beyond?
Most real estate portfolios weren’t built for that question. They were built for a world where cheap refinancing would always be available. Where cap rates would compress, not expand. Where rent growth would outpace interest expense forever.
None of those assumptions are guaranteed. And right now, none of them are happening.
The Reality: The portfolios in trouble today aren’t failing because the deals were bad. They’re failing because the deals were built on an interest rate environment that disappeared.
But here’s what most investors haven’t connected yet. This isn’t just a sponsor problem. This is an LP problem. If you’re passively invested in a deal that “worked at 4%” but doesn’t work at 7%, the math isn’t broken. The assumption was.
I’ve seen it firsthand. Sponsors who can’t refinance because no lender will touch their current basis. LPs trapped in deals where the hold period just doubled with no exit in sight. Capital calls nobody expected showing up in inboxes from sponsors who promised “conservative underwriting.”
The deals looked great at 4%. At 7%, the same deals are bleeding cash.
That’s not bad luck. That’s a structural problem. The deal was underwritten for a rate environment, not for a range of outcomes. And when the environment shifted, there was no margin to absorb it.
I build differently. Not because I predicted rates would stay high. Because I don’t predict rates at all.
Short duration is the foundation. Ninety to 180-day loans. Capital goes out, the project completes, the borrower refinances or sells, and the money comes back. I’m not betting on where rates will be in five years. I’m not hoping a refi market appears on schedule. The loan is designed to resolve itself in months, not decades.
Strong collateral is next. Real property I’ve walked and underwritten myself. Not a company’s balance sheet. Not a revenue projection. A building with a value I can verify, in a market I understand. If something goes wrong, the collateral answers the question. Not a forecast.
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Conservative LTV ties it together. Room for the market to move without losing principal. If property values drop 20%, the loan still has coverage. That’s not pessimism. That’s math. The same math that kept our fund at zero defaults while other lenders are restructuring.
The investors who are hurting right now aren’t bad investors. They trusted structures that needed specific conditions to work. Low rates. Easy refinancing. Steady appreciation. When those conditions changed, the structures didn’t hold.
The investors who are sleeping well built for a range of outcomes. Not the best case. Not the worst case. A range wide enough that the specific rate environment doesn’t determine whether the deal survives.
The Bottom Line: Hope is not a structure. And a portfolio built for the rates you want is a portfolio that breaks when the rates you get are different. Most investors built for a rate environment. You’re learning to build for rate independence. That’s the difference between a portfolio that needs conditions to cooperate and one that doesn’t care if they do.
Is your portfolio built for today’s rates — or the rates you’re hoping for?
If you want to see how short-duration lending performs regardless of where rates go, I’m happy to walk through the math.
Cheers,
Jon
P.S. The best time to stress-test your portfolio was before rates changed. The second-best time is right now.