Rising Operating Expenses: What Lenders Need to Know in a Margin-Squeezed Market

As operating costs continue to climb across commercial real estate sectors, lenders are being forced to reevaluate how these pressures affect deal performance and borrower stability. In many markets, expenses for utilities, labor, insurance, and maintenance are rising faster than rent growth—shrinking margins and reshaping underwriting assumptions.

At our firm, we work closely with bridge lenders, debt funds, regional banks, and private credit providers who are navigating this shifting cost dynamic. What was once a borrower-side problem is now a key lender consideration. When expenses outpace income, even strong sponsors can find themselves facing cash flow constraints, delayed business plans, and challenges refinancing short-term debt.

In this environment, it’s critical for lenders to go beyond surface-level pro formas. Underwriting must reflect not only current income and expenses, but also the trajectory of operating costs over the term of the loan. Insurance premiums have spiked significantly in certain geographic areas, and labor costs—especially for property management and maintenance—have proven to be far less predictable than in prior cycles. These changes directly impact debt service coverage ratios, loan-to-value metrics, and overall asset performance.

From a legal perspective, this means loan documents must be crafted to account for financial variability. We’re advising lender clients to build in strong information rights, trigger thresholds for financial covenant testing, and mechanisms for periodic rent roll and expense audits. Flexibility and enforceability go hand in hand here—especially when borrowers seek extensions or modifications based on operational headwinds.

Additionally, we’re seeing more lenders request detailed operating budgets and expense reserves upfront. These are practical tools to protect against unanticipated increases that could impair loan performance. When reserves are properly structured and paired with clear disbursement controls, lenders can maintain more influence over the property’s financial health throughout the loan term.

Rising expenses aren’t just a cost issue—they’re a margin and timing issue that affects exit strategies, valuation, and refinance potential. For bridge lenders, where the margin for error is already narrower, it’s especially important to approach every deal with both financial discipline and legal foresight.

Our firm continues to support lenders in adapting to these new realities, helping ensure they remain competitive while protecting capital in today’s evolving market.