Actions By The Fed Do not Singularly Determine Commercial Real Estate Interest Rates

While the Fed is an important driver in the economy, it isn’t the only factor that shapes long-term interest rates for commercial real estate. 

We saw interest rates move independently of the Fed’s actions in the year 2000.  At that time, the Fed had abandoned their two year fight against inflation and turned on its heels with an aggressive effort to prevent a recession.  Over the next twelve months, the Fed cut rates eleven times - from 6.50% to 1.75%.  During that time, the 10-year US Treasury did not materially budge, keeping CRE borrowing rates for stabilized properties largely unchanged. 

Today, as in 2000, the Fed has been battling inflation for nearly two years and is hinting about three potential, near-term rate cuts that would still keep short-term rates higher than long-term rates. Construction and bridge sponsors should therefore see a lower cost of capital for their projects, while owners of stabilized properties can expect little change from today’s current financing costs.   

Commercial real estate owners considering waiting on the Fed for refinancing should be aware that there is no guarantee Fed rate cuts will lower their interest rates for stabilized properties.  The opposite could occur.