In commercial real estate (CRE), concentration risk extends beyond tenants and asset types—it also applies to capital structure. Relying too heavily on a single debt strategy or lender can introduce vulnerabilities that hinder adaptability and increase exposure to market shifts.
True debt diversification involves more than maturity laddering. It’s a deliberate risk management tool that enhances optionality and aligns financing with the evolving objectives of each asset. In volatile markets, it becomes essential to protecting and growing portfolio value.
The Risk of Uniform Capital Structures
Many mid-market CRE owners and operators tend to stick with familiar lenders or financing types—such as agency loans for multifamily, bridge debt for value-add projects, or long-term CMBS for retail. While consistency can simplify execution, overreliance on a single capital strategy introduces several risks:
- Reduced negotiating power in future finances or acquisitions due to a lack of competitive tension. Repeat use can improve terms, but limits pricing discovery.
- Concentrated exposure to interest rate spikes or credit shifts. Laddering helps, but single-source reliance still carries risk.
- Liquidity mismatches, especially when loan maturities misalign with asset business plans.
- Limited transactional flexibility makes it harder to pivot, sell, or recapitalize when market conditions change.
Real-World Example:
In 2022, a CRE sponsor with $75M of suburban office assets faced exit challenges due to inflexible debt terms. The properties were financed with long-term, fixed-rate loans that lacked prepayment flexibility. Despite some buyer interest, rigid loan structures and broader market headwinds made early exits difficult and reduced proceeds.
Benefits of a Diversified Debt Approach
A diversified capital strategy equips CRE professionals with the tools to align financing with asset needs, navigate changing markets, and reduce systemic exposure. Key benefits include:
- Stronger liquidity control by matching debt timelines with asset-level hold periods and cashflow profiles.
- Greater negotiating leverage by maintaining optionality across multiple lender relationships.
- Asset-specific customization—financing can be optimized based on location, property type, and investment strategy.
- Resilience against credit shocks, as diverse sources are less likely to retrench at the same time.
Core Elements of a Diversified Debt Strategy
1. Maturity Laddering
Staggering loan maturities across time horizons minimizes exposure to market disruptions or rate spikes at any single point in time.
Example: Instead of refinancing a $60M portfolio all in 2026, structure maturities in 2025, 2026, and 2028 to avoid a single-cycle rollover.
2. Capital Source Variety
Use a blend of debt types—bank, life co, debt fund, CMBS, and agency—based on deal profiles.
Example: Deploy life company loans on stabilized industrial with low leverage, while using debt fund bridge capital for transitional multifamily.
3. Structural Flexibility
Combine fixed and floating rate instruments, evaluate prepayment features, and layer in mezzanine or preferred equity when appropriate, allowing for customized financing solutions across asset strategies.
Example: A CRE owner combines a 60% LTV fixed-rate senior loan with 10% preferred equity, preserving flexibility for future recapitalization.
4. Geographic and Asset Class Segmentation
Match financing structures to regional dynamics and property-specific risk—acknowledging that lender appetite and asset strategies vary by market.
Example: In growth markets like the Sun Belt, transitional multifamily assets may align with short-term bridge debt and cap protection. In stable Midwest retail markets, long-term fixed-rate loans from local banks or life companies may be more appropriate.
Challenges to Anticipate
While diversification creates strategic benefits, it requires intentional management. Potential pitfalls include:
- Complexity in tracking and administration
- Varied covenant packages and reporting demands
- Lender coordination issues across capital stack
This is where technology and advisory partners can play a critical role. Asset and debt management platforms help centralize loan data, automate covenant tracking, and flag refinance or rate cap risks well ahead of time.
Advisory Insight: Building Your Capital Stack Playbook
At Defease With Ease | Thirty Capital, we help CRE owners, operators, and decision-makers translate debt diversification into a strategic playbook. This framework ensures alignment between capital strategy and asset goals throughout the investment lifecycle.
Here’s how to build yours:
Step 1: Segment and Define Objectives
Group assets by type, market, and business plan. For each segment, identify financing priorities (liquidity, cost, flexibility, etc.) to guide optimal structuring.
Step 2: Define Financing Objectives by Segment
Determine priorities for each segment—whether it’s maximum proceeds, liquidity preservation, prepayment flexibility, or long-term cost minimization.
Step 3: Establish Guardrails and Benchmarks
Define portfolio-level targets:
- Maximum percentage exposure to any single lender
- Target floating vs. fixed ratio
- Acceptable prepayment lockout periods
- Maximum maturity exposure per calendar year
Step 4: Consider a Lender Diversification Matrix
For borrowers with multiple assets or complex strategies, maintaining a mix of lender relationships can improve flexibility and reduce concentration risk. A matrix helps visualize exposure across:
- Bank lenders
- Life insurance companies
- Debt funds
- CMBS conduits
- Agency sources (Fannie, Freddie, HUD)
Step 5: Incorporate Scenario Planning
Build models that simulate rate shocks, capex delays, and early exits. Test how diversified structures perform under stress.
Step 6: Centralize Data & Review Quarterly
Use an asset and debt management platform to track all loan terms, maturities, covenants, and rate cap expirations. Schedule quarterly capital strategy reviews with your advisory team to adjust based on current market conditions.
Conclusion: Don’t Let Capital Become a Constraint
Diversification shouldn’t stop at assets and tenants. A robust debt strategy is crucial to managing risk, unlocking value, and navigating market uncertainty with confidence. If your capital stack relies too heavily on one source or structure, it may be time to rethink your approach.
Get a second opinion or bounce your ideas off our team of experts. Connect with us to gain the clarity and confidence you need to move forward.
