By Taylor Williams
ATLANTA — There is nothing wrong with the new interest rate environment that currently governs capital markets activity in commercial real estate, and borrowers just need to adjust their expectations, put them into historical context and get back to making deals.
This is the view of at least a couple veteran lenders who spoke at the InterFace Multifamily Southeast conference on Dec. 4 at the Cobb Galleria Centre in Atlanta. The event is now in its 15th year and continues to attract hundreds of multifamily developers, investors and lenders from across the region.
Editor’s note: InterFace Conference Group, a division of France Media Inc., produces networking and educational conferences for commercial real estate executives. To sign up for email announcements about specific events, visit www.interfaceconferencegroup.com/subscribe.
Following two cuts totaling 75 basis points earlier this year, the target range for the federal funds rate, or the overnight interest rate at which banks lend to each other, currently sits at 4.5 to 4.75 percent. This year’s cuts marked the first monetary easing by the Federal Reserve in more than four years, and while at least a couple more slashes to the overnight rate are anticipated in the coming months, the Fed is not likely to revert pre-pandemic levels of borrowing costs.
But shouldn’t be a deterrent to deal volume, according to panelist Chad Hagwood, senior managing director in the Birmingham office of New York City-based Lument.
“We really have to be objective with where rates are,” he said. “The biggest difficulty we have right now is simple perception; there’s nothing wrong with a 5.75 [percent interest] rate, which is where we are today. People are comparing rates to what they were four or five years ago, when money was basically free. Free [money] was never part of the business until a few years ago, and people need that 3 percent rate to make their deals work again.”
“It’s not coming back,” Hagwood continued, speaking to the historically low federal funds rate ranges that existed between roughly 2018 and 2021. “But the rate environment that we’re in today is still beautiful, it’s just not as beautiful as it was previously.”
Panelist Loren Biller, senior vice president at PACE Loan Group, agreed with this assessment.
“At one point we were very optimistic that rates would go back down to ranges that we thought of as normal, but it’s not going to happen,” he said. “At the macroeconomic level, there’s going to be continued upward pressure on bond yields. For those in the real estate business, that means — as it always has — that you’re going to have to pay a certain rate to get the capital. And every interest rate cut gets offset by a recalibration in 10- and two-year Treasury yields. So the market we’re in should continue for the foreseeable future.”
The Federal Reserve ended its string of 11 consecutive rate hikes at the September meeting of the Federal Open Markets Committee (FOMC) when it delivered a 50-basis-point cut. That move was followed by another 25-basis-point cut in November. While some lenders and investors may view this as proof positive that a pattern of cuts is taking shape, others are not quite ready to embrace that notion.
“It’s all about the expectations and digesting of these economic data points, and it’s going to take consistent job and inflation numbers that are less than stellar to get the Fed to continue to lower interest rates,” said Eric McGee, vice president and senior mortgage banker at KeyBank Real Estate Capital’s Charlotte office. “We may see rates come inside a bit from where we are now as the market digests the policies of the new [presidential] administration and what that means for the economic climate.”
McGee added that he does not expect 10-Year Treasury yields — the other key benchmark on which commercial loans are priced — to drop much below 3.75 percent in the first half of 2025, barring a “black swan” event of some sort. The comment laid the foundation for other panelists to speculate on how irregular movement in the 10-Year Treasury yield has also contributed to soured perceptions of the market.
Traditionally, interest rates and bond prices move in lockstep, while yields on bonds move inversely to interest rates. But during this most recent cycle of rate hikes, yields on 10-Year Treasuries displayed greater volatility while trending upward overall — a bucking of the historical trend. The yield currently sits at 4.26 percent, up from 3.71 percent a year ago.
Panel moderator Jason Scott, managing director at the Atlanta office of Regions Bank, explained the role that shifting yields on 10-Year Treasury notes have played in the multifamily acquisitions market, which was stymied by widening of bid-ask spreads during the rate hike campaign.
“The acquisitions market has struggled due to the disconnect between buyers and sellers on cap rates and valuations of assets,” he said. “When you had 10-Year coupons being printed at 2.75 percent, you could pay a 3 percent cap rate without a problem. In today’s world, where the 10-Year [yield] is roughly 4.25 [percent], you can’t pay that same cap rate.”
The reasoning behind Scott’s statement lies in the fact that Treasury notes are risk-free, backed by faith in the U.S. government, whereas real estate comprises hard assets that are subject to a variety of investment risks. A cap rate as low as 3 percent most likely indicates a very high sales price, meaning the investor runs the risk of buying at or near the top of the market. There is little logic in taking such risk when the investor could just as easily buy a risk-free Treasury bond and achieve a return above the going-in cap rate.
Although the vacillations of the 10-Year Treasury have complicated lenders’ efforts to price certain deals and the Federal Reserve has shown a willingness to deviate from the actions it telegraphs to the market, to some lenders, navigating these variables and uncertainties are simply part of the job. After all, if it was easy, everyone would do it.
“We don’t want easy; we want to be better,” said Hagwood. “Real estate is challenging but it’s fun; there’s never been year where we didn’t need one more deal, to work harder and to rely on experience. We’ve never had more opportunity than we have in 2025 and 2026 because fewer people are willing to do the hard work, so we think that next year will be a damn good year.”