Fed Raises Rates for First Time Since July 2023

At its September meeting, the Federal Open Market Committee (FOMC) unanimously raised the target range for the federal funds rate by a quarter percentage point to 3.75% to 4.00%, with a second rate hike on the table for this year. Excluding Chairman Warsh, meeting participants submitted projections for the quarterly Summary of Economic Projections (SEP). Updated median projections show the year ending with a 4.1% federal funds rate (up from 3.8% in June), total PCE inflation at 3.7% (up from 3.6%), GDP growth at 2.3% (up from 2.2%), and unemployment dropping to 4.1% (down from 4.3%).

Fed Chair Kevin Warsh cited three key trends since the FOMC’s last meeting seven weeks ago that contributed to the decision to raise the fed funds rate: accelerating economic growth, rising inflationary pressures, and heightened geopolitical uncertainty. He continued to underscore the Fed’s firm commitment to returning inflation to its 2% target.

As Interest Rates Rise, Borrowers Pivot to Short-Term Debt While Sellers Face Price Adjustments

“Even before the Fed’s decision on Wednesday, treasuries had spiked in recent weeks,” said Ben Schlegel, Senior Director of the Capital Services Group. “Consequently, borrowers have already started pivoting to more flexible short-term debt to avoid locking in higher, long-term rates. They are also seeking rate caps to protect them if rates keep climbing.”

Schlegel noted that investor demand for long-term fixed debt remains, but higher rates are creating downward pressure on asset values, squeezing proceeds on refinances and acquisitions due to stricter debt service coverage ratio (DSCR) constraints enforced by banks and Agencies.

“Higher rates are impacting proceed levels on acquisitions, forcing sellers to adjust their pricing expectations downward to meet the market,” Schlegel said.

Abundant Debt Liquidity Sparks Lender Competition

“Fortunately, there is still an abundance of liquidity in the market, which is driving strong competition across debt providers,” Schlegel said. “Therefore, we’re encouraging borrowers to run competitive processes rather than rely solely on their existing relationships.”

For example, CMBS issuance rose to $76.2 billion through July 2026, with single-asset, single-borrower (SASB) transactions backed by one property or owner, accounting for $58 billion of the total, according to Trepp.

Unlike the Covid-era, however, capital isn’t following broad regional allocation trends such as investments in markets in the Southeast and Sunbelt like Austin, Texas, where overbuilding has resulted in ,negative rent growth. Instead, developers, investors and lenders are functioning more as selective “stock pickers,“ evaluating projects purely on a one-off, deal-by-deal basis. Schlegel said.

“Free market multifamily remains sought after due to continuous rent growth in major markets like New York City, offsetting rate increases and helping preserve cash-neutral refinances,” Schlegel said. “In contrast, there is a constrained lender pool for rent stabilized assets in NYC, higher coverage ratios, lower LTVs, and stricter underwriting.”

In some cases, however, debt funds are offering more attractive terms than banks, including non-recourse loans for rent stabilized assets. “When banks step away, private lenders are stepping in with interesting solutions,” Schlegel said.

Key Markets Sustain Steady Investment Sales Despite Higher Rates

“Although pricing is adjusting, volume is still holding,“ Schlegel said.

Following a strong first half where NYC sales surged 37% year-over-year to $17.38 billion, that transaction volume is directly feeding loan activity. As a result, the Capital Services Group is managing a robust national pipeline that is more than two and a half times larger than last year’s.

Although the Capital Services Group is currently negotiating terms for bridge loans, the team has also closed a number of fixed rate loans in recent weeks. Examples of activity include:

• A $64,000,000 condo inventory and renovation loan for the bulk condominium purchase in Manhattan. Terms of the three-year floating-rate bridge loan include a rate of SOFR + 4.75%, 81% LTC and 70% of net sellout.
• A $14,800,000 bridge loan to buy and renovate a 100-unit workforce housing property built in the 1960s in Lansdale, PA. Terms of the three-year floating-rate loan included a rate of SOFR + 3.40%, 82% LTC and 75% of stabilized LTV.
• A $7,025,000 acquisition loan for a 62,213-square foot, 78-unit apartment building in Portland, OR. Terms of the five-year, non-recourse bank loan, which closed in 33 business days, included a 6.28% rate and a 30-year amortization.
• A $5,143,000, refinance loan for a Project Section 8 multifamily with 30 units in Philadelphia. Terms of the five-year bank loan included a 6% interest rate and 70% LTV.
• A $3,590,000 refinance loan for a 16-unit free market multifamily in Philadelphia. The five-year bank loan featured a 6.37% interest rate and 70% LTV.

Strong Market Liquidity Favors Early Action on Upcoming Debt Maturities

While the Fed’s latest rate hike presents unmistakable headwinds for commercial real estate, the market’s resilience lies in its adaptability.

With abundant market liquidity and flexible capital filling the gaps, navigating today’s landscape will require sharp underwriting and agile execution.

By staying nimble in strategic product types and high-growth submarkets, proactive market participants can continue to unlock value and successfully execute transactions despite a higher-for-longer rate environment.