Fed Rate Cut: A Double-Edged Sword for Commercial Real Estate

The Federal Reserve announced a more significant rate cut than expected in September, sparking optimism within the commercial real estate industry. However, despite this positive development, interest rates for many commercial loan products have increased. 

Why the Discrepancy? 

The answer lies in the underlying mechanics of how interest rates for commercial property loans are determined. 

Fixed-Rate Loans: These loans are typically priced off Treasury yields. While the Fed's rate cut may have initially impacted short-term rates, long-term Treasury yields have risen since September. This upward trend has directly translated to higher interest rates for fixed-rate commercial loans. 

Floating-Rate Loans: These loans are often indexed to the Secured Overnight Financing Rate (SOFR). The SOFR index did indeed decrease following the Fed's rate cut, benefiting borrowers with floating-rate loans. 

The Need for Low-Spread Financing

To mitigate the impact of rising Treasury yields, borrowers need lenders who can offer low spreads. Life insurance companies are a prime source of low-cost capital, often providing some of the lowest spreads in the industry. 

As a result, borrowers who can access financing through life insurance companies can potentially secure more favorable terms and lower overall borrowing costs. 

SF Capital’s LifeCo correspondent relationships can help you get deals financed. Contact us to discuss your loan requirements.