Why CRE Isn’t Celebrating the Recent Interest Rate Cuts

The Federal Reserve cut interest rates twice in two weeks in response to the impacts of the COVID-19 outbreak. First, the Fed cut rates to 1% to 1.25% on March 3, and then, in an emergency meeting, made a second cut to 0% to .25% on March 15. Many in the commercial real estate industry say the move was a necessary response to the economic impacts of the virus outbreak, but that they will have little impact on new acquisition commercial real estate deals.

“It was necessary to show that the Fed is active, interested and involved,” Patrick Ward, founder and president of Metro Group Realty Finance, tells GlobeSt.com. “However, commercial real estate debt is really based on the long-term Treasury, and that actually went up 25 basis points over the last couple of days. We watch the 10-Year Treasury, so when the Fed lowers the discount rate to near zero, it is good for the global picture, but commercial real estate financing is sometimes counter to that.”

There are currently a lot of question marks about the length of this outbreak, the severity and the sheltering period. Lenders are responding with caution, as is typical during times of uncertainty. “We have seen dramatic cycles like this, and when this happens, lenders do one of two things,” says Ward. They either sit back because they don’t know where things are headed, or they put in artificial floors to protect themselves. They don’t know where the indexes are going and they don’t know where the spreads are going. That is what we are seeing now.”

While the rate cuts aren’t having a significant impact on new deals, there is opportunity for borrowers looking to refinance. Ward said that some clients will be able to lock in 3% rates. “We got a call from a client that we have worked with in the past. We have refinanced their Orange County portfolio three times in the last 30 years, and they called me yesterday to say that if they could borrow around 3%, they would refinance their portfolio,” he says. “They will pull some money out and buy at a 5% cap rate—that is positive leverage.”

As for rates, Ward says that most lenders active in the commercial space are at about 3.5%. “The market is very pure in that there are two dominant lenders for commercial deals are CMBS and portfolio lenders,” he says. “The portfolio lenders are typically within the 3% to 3.6% range – this is dependent on the length of the fixed rate term. Today, the pricing for CMBS offerings are in a similar rate range but could be slightly higher, nearing the high 3% range for higher leverage transactions.”

As for now, there is no estimate on how long rates will stay low, but, as Ward says, “They have nowhere to go but up.”