Navigating the New Normal: A Sector-by-Sector Look at CRE Underwriting in 2025
Why Underwriting Matters More Than Ever
Commercial real estate underwriting has always been the lens through which risk is priced, capital is allocated, and returns are justified. But in 2025, underwriting is no longer a static exercise built on historical averages and optimistic forward projections. It has become a forward-looking stress test, designed to answer a much harder question:
Will this asset still work if the world doesn’t revert to “normal”?
Over the last decade, CRE underwriting has passed through three distinct regimes:
Pre-COVID (2017–2019):
Characterized by low interest rates, stable demand patterns, and aggressive leverage supported by expanding valuations.COVID Era (2020–2021):
Marked by extreme uncertainty, sudden cash flow disruption, and defensive underwriting focused on survival and liquidity.Today (2024–2025):
Defined by higher-for-longer interest rates, structurally altered demand drivers, tighter capital markets, and a permanent reset in risk perception.
What makes today’s underwriting environment fundamentally different is that conservatism is no longer cyclical, it is structural. Lenders and investors are not waiting for a rebound to prior norms. Instead, they are underwriting to a new baseline that assumes:
Higher exit cap rates for longer
Lower terminal values
Greater income volatility
More equity at risk
Less refinancing optionality
This article provides a sector-by-sector breakdown of how underwriting standards have evolved across the major CRE asset classes—office, multifamily, industrial, retail, hospitality, self-storage, and single-family rental/build-to-rent (SFR/BTR)—with a specific focus on how today’s assumptions differ meaningfully from both pre-COVID and COVID-era frameworks.
The Three Pillars of CRE Underwriting
Before diving into individual sectors, it’s important to ground the discussion in the three metrics that anchor virtually every institutional underwriting model:
Loan-to-Value (LTV)
LTV measures how much leverage a lender is willing to extend relative to asset value. Declining LTVs signal reduced lender confidence in collateral durability and future valuations.
Debt Service Coverage Ratio (DSCR)
DSCR measures a property’s ability to service debt from operating income. Rising DSCR requirements indicate greater concern around income volatility, expense growth, and refinancing risk.
Exit Cap Rate
The exit cap rate reflects the assumed yield at disposition. Higher exit caps imply lower future values and serve as a margin-of-safety buffer against valuation compression.
Across nearly every asset class, today’s underwriting reflects lower leverage, higher coverage, and materially higher exit caps than either pre-COVID or COVID-era models.
Office: From Core Asset to Capital Risk
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 65% - 75% | 1.25x - 1.35x | 6.00% - 6.75% | Stable leasing, long-term demand, CBD dominance |
| COVID (2020 - 2021) | 50% - 60% | 1.40x - 1.60x | 6.75% - 7.75% | Remote work shock, lease rollover risk/td> |
| Today (2024 - 2025) | 50% - 60% | 1.45x - 1.65x | 7.25% - 8.50% | Hybrid work permanence, obsolescence, exit illiquidity |
Pre-COVID: Stability and Leverage
Office underwriting assumed leasing continuity, modest rent growth, and stable exit liquidity—particularly for CBD assets in major metros.
COVID Era: Shock and Defensive Retrenchment
The pandemic shattered those assumptions almost overnight. Remote work, tenant downsizing, and leasing freezes forced lenders to reprice office risk aggressively:
LTVs dropped to 50–60%
DSCRs increased to 1.40x–1.60x
Exit caps widened to 6.75%–7.75%
Underwriting focused on lease rollover risk, tenant credit, and near-term cash flow survival rather than long-term growth.
2025: Structural Obsolescence Risk
Today’s office underwriting is even more conservative—not because uncertainty is higher than during COVID, but because the risk is now understood as permanent.
LTV: 50–60% (often lower for Class B/C)
DSCR: 1.45x–1.65x
Exit Cap Rates: 7.25%–8.50%
The key shift is philosophical: many office assets are no longer underwritten as income properties at all. Instead, they are evaluated based on:
Alternative use value
Conversion feasibility
Land value or liquidation value
Class A, amenitized, ESG-compliant office buildings in top markets remain financeable. Everything else faces punitive underwriting—or none at all.
Office is no longer a cyclical recovery story. It is a capital reallocation story.
Multifamily: Resilient, But Reset
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 70% - 80% | 1.20x - 1.30x | 5.25% - 6.00% | Strong rent growth, low vacancy |
| COVID (2020 - 2021) | 65% - 75% | 1.25x - 1.40x | 5.75% - 6.50% | Urban rent pressure, collections risk/td> |
| Today (2024 - 2025) | 60% - 70% | 1.30x - 1.50x | 6.00% - 6.75% | Supply pressure, affordability constraints |
Pre-COVID: Growth Asset With Thin Margins
Multifamily entered 2020 with strong tailwinds: housing shortages, wage growth, and favorable demographics.
LTV: 70–80%
DSCR: 1.20x–1.30x
Exit Cap Rates: 5.25%–6.0%
Underwriting assumed continued rent growth, low vacancy, and easy refinancing.
COVID Era: Proving Its Defensive Qualities
While concerns around rent collections briefly surfaced, multifamily proved remarkably durable.
LTVs moderated to 65–75%
DSCRs increased to 1.25x–1.40x
Exit caps ticked up to 5.75%–6.5%
Suburban and Sunbelt assets outperformed, while dense urban markets lagged.
2025: Supply, Affordability, and Expense Pressure
Today’s multifamily underwriting reflects a more complex reality:
LTV: 60–70%
DSCR: 1.30x–1.50x
Exit Cap Rates: 6.00%–6.75%
Key underwriting changes include:
More conservative rent growth assumptions
Higher operating expense ratios (insurance, taxes, payroll)
Elevated exit caps, particularly in oversupplied Sunbelt markets
Multifamily remains a favored asset class—but no longer an automatic winner. Underwriting today differentiates sharply between markets, vintages, and business plans.
Industrial: From Scarcity Premium to Normalized Cash Flow
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 65% - 75% | 1.25x - 1.35x | 5.75% - 6.50% | E-commerce-driven demand |
| COVID (2020 - 2021) | 65% - 75% | 1.25x - 1.40x | 5.50% - 6.25% | Supply chain dislocation/td> |
| Today (2024 - 2025) | 60% - 70% | 1.30x - 1.45x | 6.00% - 6.75% | Normalized absorption, new supply |
Then: Driven by the e-commerce boom, industrial assets saw strong performance pre-COVID. Underwriting reflected this enthusiasm with LTVs at 65%-75%, DSCRs around 1.25x-1.35x, and cap rates at 5.75%-6.5%.
During COVID: Demand surged for last-mile and logistics space. Lenders maintained leverage levels but began tightening DSCR requirements to 1.25x-1.40x. Exit cap rates compressed further to 5.5%-6.25%.
Now (2025): The sector remains healthy, but lenders are no longer treating it as a scarcity play. LTVs are slightly lower at 60%-70%, DSCRs have moved to 1.30x-1.45x, and cap rates have expanded modestly to 6.0%-6.75%.
Investor Insight: Supply has caught up with demand in many regions, reducing pricing power. While still a core portfolio holding, industrial is now underwritten for normalized absorption rather than hypergrowth.
ESG and Obsolescence in Industrial
Modern industrial underwriting considers not only demand fundamentals but also property specs. Facilities with low ceiling heights, insufficient power infrastructure, or lack of dock doors are being penalized in both valuation and underwriting. Institutional buyers now seek clear heights of 32 feet or more, energy-efficient systems, and proximity to labor hubs.
Additionally, ESG (Environmental, Social, Governance) factors are gaining relevance. Facilities with solar panels, EV charging infrastructure, or LEED certification can achieve marginally better underwriting terms due to improved tenant retention and lower operating costs.
Retail (Necessity-Based): A Selective Recovery
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 65% - 75% | 1.30x - 1.40x | 6.25% - 7.00% | Tenant stickiness, grocery anchors |
| COVID (2020 - 2021) | 55% - 65% | 1.40x - 1.60x | 7.00% - 8.00% | Tenant survival risk/td> |
| Today (2024 - 2025) | 60% - 70% | 1.35x - 1.55x | 6.75% - 7.75% | Credit tenancy, service retail |
Then: Retail was already under stress pre-COVID, but necessity-based tenants (grocery stores, pharmacies) provided some ballast. LTVs were 65%-75%, DSCRs 1.30x-1.40x, and exit cap rates in the 6.25%-7.0% range.
During COVID: With shutdowns and tenant failures, lenders tightened standards significantly. LTVs dropped to 55%-65%, DSCRs rose to 1.40x-1.60x, and cap rates jumped to 7.0%-8.0%.
Now (2025): Cautious optimism has returned. LTVs have ticked back up to 60%-70%, DSCRs are 1.35x-1.55x, and exit cap rates have settled at 6.75%-7.75%. Financing is still limited to centers with strong anchors and credit tenants.
Investor Insight: Discretionary retail remains unfinanceable in many cases. Grocery-anchored and service-oriented retail centers are still fundable but require thorough tenant analysis.
Tech Integration and Omni-Channel Risk
Retail underwriting in 2025 also factors in omni-channel dynamics. Tenants with strong online/offline integration—such as Target and Walmart—receive more favorable treatment due to their ability to drive foot traffic. Conversely, spaces occupied by legacy retailers without a digital strategy are red-flagged.
Co-tenancy clauses, percentage rent structures, and sales reporting rights are all being scrutinized during underwriting. Investors are advised to review tenant leases line-by-line and model anchor tenant default scenarios.
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Hospitality: Rebounding with Caution
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 60% - 70% | 1.35x - 1.50x | 7.00% - 8.00% | Stable RevPAR |
| COVID (2020 - 2021) | 40% - 55% | 1.60x - 2.00x | 8.50% - 10.00% | Severe cash flow volatility caused by travel concerns/td> |
| Today (2024 - 2025) | 50% - 60% | 1.50x - 1.75x | 8.00% - 9.50% | Leisure-led recovery |
Then: Hospitality was a solid performer pre-pandemic, with stable RevPAR and healthy margins. Underwriting reflected this with LTVs at 60%-70%, DSCRs of 1.35x-1.50x, and exit cap rates between 7.0%-8.0%.
During COVID: The sector was hit hardest. Travel bans and social distancing decimated cash flow. LTVs fell to 40%-55%, DSCRs jumped to 1.60x-2.00x, and cap rates soared to 8.5%-10.0%.
Now (2025): The rebound has been uneven, led by leisure markets. LTVs have recovered somewhat to 50%-60%, with DSCRs between 1.50x-1.75x. Cap rates remain high at 8.0%-9.5% due to lingering volatility.
Investor Insight: Lenders prioritize cash reserves, branded flags, and experienced operators. Financing is often structured with performance hurdles and cash traps.
Seasonality, Staffing, and Expense Controls
Modern underwriting reflects the complex realities of hotel operations, including high labor costs, seasonal volatility, and dependence on brand affiliation. Urban conference hotels remain under pressure due to the slow return of corporate travel, while luxury and resort destinations have fared better.
CapEx reserve requirements are higher than in prior cycles, and operators are expected to provide detailed forecasts of ADR (Average Daily Rate), occupancy, and revenue per available room (RevPAR). Revenue management systems and asset-light operating models are being rewarded.
Self-Storage: Stabilizing Post-Boom
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 65% - 75% | 1.25x - 1.35x | 6.00% - 6.75% | Fragmented ownership |
| COVID (2020 - 2021) | 65% - 75% | 1.30x - 1.45x | 5.75% - 6.50% | Residential mobility |
| Today (2024 - 2025) | 60% - 70% | 1.30x - 1.50x | 6.50% - 7.25% | Revenue normalization |
Then: Self-storage was a fragmented, overlooked sector with modest underwriting. LTVs of 65%-75%, DSCRs of 1.25x-1.35x, and cap rates around 6.0%-6.75% were common.
During COVID: The sector boomed as residential mobility increased. Lenders improved terms slightly: DSCRs rose to 1.30x-1.45x, and cap rates fell to 5.75%-6.5%.
Now (2025): With demand stabilizing, underwriting reflects normalization. LTVs are slightly lower at 60%-70%, DSCRs 1.30x-1.50x, and cap rates have reverted upward to 6.5%-7.25%.
Investor Insight: Revenue assumptions are now more conservative, with an emphasis on existing occupancy trends and local competition.
Digital Access and Operational Efficiency
Self-storage underwriting now evaluates management platform efficiency, unit mix, and the presence of digital access and automation features. Facilities offering mobile app access, contactless entry, and dynamic pricing engines attract premium financing.
Lease-up velocity, average length of stay, and discounting practices are all modeled during underwriting. Saturation risk is key—especially in secondary markets with a rapid influx of new supply.
SFR / BTR: Cost Pressure Meets Investor Appetite
| Period | LTV | DSCR | Exit Cap Rate | Core Underwriting Assumptions |
|---|---|---|---|---|
| Pre-COVID (2017 - 2019) | 65% - 75% | 1.20x - 1.30x | 5.75% - 6.50% | Institutional rollout |
| COVID (2020 - 2021) | 65% - 70% | 1.25x - 1.40x | 5.50% - 6.25% | Suburban migration |
| Today (2024 - 2025) | 60% - 70% | 1.30x - 1.50x | 6.25% - 7.25% | Operating cost inflation -- services, taxes, insurance, etc. |
Then: Pre-pandemic, institutional single-family rental (SFR) and build-to-rent (BTR) were nascent asset classes. Underwriting was optimistic, with LTVs of 65%-75%, DSCRs of 1.20x-1.30x, and cap rates at 5.75%-6.5%.
During COVID: Suburban migration turbocharged this sector. Lenders responded with slightly more cautious DSCRs (1.25x-1.40x) and tighter LTVs (65%-70%). Cap rates dropped to 5.5%-6.25%.
Now (2025): With construction and operating costs rising, underwriting reflects these headwinds. LTVs now sit at 60%-70%, DSCRs are 1.30x-1.50x, and exit cap rates have increased to 6.25%-7.25%.
Investor Insight: While still attractive, this asset class requires strong operational control and conservative rent growth projections.
Institutionalization and Scalability
SFR/BTR underwriting increasingly mirrors multifamily in structure, with attention to rent collection efficiency, amenity package differentiation, and HOA obligations. Institutional investors favor portfolios of 100+ units, managed by central platforms that offer economies of scale.
Key underwriting metrics now include turnover rates, maintenance cost per unit, and average lease duration. Markets with strong job growth, school quality, and proximity to suburban employment centers receive preferential treatment.
The 2025 Lender & Investor Playbook
The underwriting changes across all CRE sectors share common themes:
More Equity: LTVs have generally declined, requiring borrowers to bring more equity.
Higher DSCRs: Lenders now demand stronger cash flow coverage to mitigate volatility.
Cap Rate Recalibration: Exit assumptions are more conservative across the board.
Asset Selectivity: Only properties with strong fundamentals and sponsor credibility are being financed.
Lender Priorities:
Focus on DSCR durability over valuation.
Underwrite for higher-for-longer interest rates.
Emphasize asset management quality.
Investor Strategies:
Model downside scenarios as base case.
Use equity-heavy capital stacks.
Seek value in distressed or recapitalized deals.
Opportunities to Watch:
Distressed office to residential conversions.
Recapitalizations of over-leveraged assets.
Strong sponsors in secondary markets.
Properties with ESG-forward capital improvement plans.
Conclusion: Adapting to the New CRE Reality
Underwriting is no longer about stretching to maximize returns. It’s about resilience, sustainability, and realistic expectations. In 2025, every CRE sector requires a sector-specific lens and a willingness to challenge assumptions.
The playbook has changed. And for investors and analysts, success lies in staying ahead of it. Working with data-backed platforms like CoreCast from The Fractional Analyst can help navigate this shift with real-time market comps, custom dashboards, and streamlined forecasting tools.
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Sources
The following data sources inform the underwriting ranges, capital markets commentary, and sector-level assumptions discussed throughout this analysis:
Trepp (CMBS, lending standards, distress tracking):
https://www.trepp.com/trepptalkMoody’s Analytics (macro conditions, CRE risk models):
https://www.moodysanalytics.com/solutions/commercial-real-estateCBRE Research & Insights (sector fundamentals, cap rates, leasing trends):
https://www.cbre.com/insights/books/us-real-estate-market-outlookJLL Research (capital markets, underwriting, investor sentiment):
https://www.us.jll.com/en/trends-and-insights/researchMortgage Bankers Association (lending conditions, origination data):
https://www.mba.org/news-and-research/research-and-economicsYardi Matrix (U.S. self storage)
https://www.yardi.com/news/press-releases/yardi-matrix-reports-u-s-self-storage-market-holding-steady-as-2025-closes/