Rates Are Rising. CRE Is Adapting.

The Federal Reserve hike rates by 25 bps on September 16; the first increase since 2023. Drawing on SitusAMC’s deep bench of professional knowledge and experience, this article examines how this move influences commercial real estate (CRE), specifically origination and securitization activity. CRE is proving remarkably resilient in the face of higher rates, with capital continuing to flow, securitization markets adapting through innovation, and investors learning to navigate a volatile landscape.

The Fed’s latest rate hike has so far had a limited immediate impact on CRE financing and securitization activity and thus far, there has not been meaningful repricing. Ultimately, the Fed hike is occurring against a backdrop of broader uncertainty that could prove more influential to CRE than the rate increase itself, including the possibility of additional monetary tightening, geopolitical developments, political uncertainty around the midterm elections, questions surrounding AI-related investment and financing, and consumer spending. However, there is some evidence that the market may be collectively adjusting to living in a volatile environment.

The SitusAMC team has found that CMBS issuance continued through the hike, with roughly $5 billion of securitizations moving toward pricing without pushbacks. Loans that were already well into the origination process have generally continued toward execution. Borrowers and lenders appear to have become more accustomed to operating in a higher-rate environment and no longer expect a return to the exceptionally low financing costs experienced during the pandemic. In fact, current interest rates are on par with their long-term averages since the 1980s. However, expectations for another 25-basis-point hike later this year or in early 2027 may push lenders to transact before financing conditions potentially tighten further. In addition, new entrants and excess liquidity may heighten competition as lenders seek to meet production targets, potentially driving more aggressive bidding on originations, including transactions that extend beyond lenders’ traditional parameters. This pressure may also encourage lenders to pursue alternative avenues for growth, such as acquiring loans from regional-bank balance sheets or expanding further into asset-backed lending.

Changes to the composition and structure of CRE financing and securitization are likely to emerge. In risky environments, whether that is due to high interest rates or because properties have become less stabilized and more transitional, investors typically turn to bridge loans and CRE CLOs. Therefore, SitusAMC expects origination activity for these products to increase toward the end of this year after a quiet summer. 

More flexible options, such as five-year conduit loans, are expected to gain further share relative to traditional 10-year structures, particularly given the limited spread difference between five- and 10-year Treasury yields and borrowers’ reluctance to lock themselves into longer-term financing at current rates. If properties become less stabilized and more transitional, there will likely be an increase in bridge loans, including two- or three-year loans with annual extensions through year five. The new multifamily-only conduit product also provides flexibility for investors. 

Rate buydowns should also become more prevalent. Conduit deals are increasingly adding schedules for rate buydowns to distinguish them from loans with actual lower coupons than when they were originated. 

A meaningful cohort of five-year loans originated in 2021 and 2022 is moving closer to maturity, introducing additional pressure on borrowers to refinance into a materially different rate environment. Borrowers that need to transact and have sufficient capital will pursue a five-year conduit or park debt on their balance sheets while waiting for more favorable financing conditions. Borrowers without liquidity face a greater risk of delinquency or nonperformance. Borrowers without an immediate need to transact will likely try to ride out the storm. 

Eventually, the higher rate environment will hurt origination activity. As interest rates rise, lenders typically tighten loan covenants to manage increased risk, particularly in CLOs. This can include stricter DSCR tests, additional reserves for potential interest shortfalls, and other structural protections. It will be important to keep an eye on conversion rates. Because the loan process can take up to eight weeks to execute, we may need another month or two to realize the full effect of the Fed rate hike.