Fed Rate Increase Impact on Commercial Mortgage Borrowing Rates

All eyes are on Wednesday’s Federal Reserve meeting to see if they will begin this year to increase interest rates. Whatever they decide, it may have only a modest impact on borrowing costs for commercial real estate loans. The Federal Reserve may choose to increase the Federal Funds Rate, (the rate, according to Wikipedia, “at which depository institutions (banks and credit unions) actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.”). However, commercial real estate loan interest rates, either through bank, agency, CMBS or life insurance sources, are more closely tied to the yield on 10 year treasuries. And historically the yield on 10 year treasuries has been only loosely tied to the Federal Funds Rate.

Fannie Mae’s October 2015 Economic Forecast predicts that the Federal Funds Rate will rise from .1% today to .3%, .5%, .6% and .8% in Q1 through Q4 of 2016, respectively.  But they expect the yield on 10 year treasuries to rise from 2.1% today to 2.2%, 2.2%, 2.3% and 2.4% in Q1 through Q4 of 2016. In short, their forecast is for the Federal Funds Rate to rise by 70 basis points and the yeild on 10 year treasuries to to rise by only 30 basis points. More info is available at http://www.fanniemae.com/resources/file/research/emma/pdf/Economic_Forecast_101615.pdf. If that holds true, even if the Fed begins to raise the Federal Funds Rate, rates on commercial real estate loans can be expected to rise only modestly in 2016.

That said, rates remain near historical lows and no one is expecting rates to go down. And a 10 to 30 basis point increase in borrowing cost for a multi-million dollar commercial real estate loan can have a significant impact on cash flows. So locking up long term borrowing costs on apartment and commercial properties now just makes good sense.