As Fed Hikes Rates for First Time Since 2023, Commercial Real Estate Comes to Terms

The Federal Reserve raised interest rates for the first time in more than three years Wednesday, but the hawkish move is not expected to curtail commercial real estate transactions in the latter half of 2026.

In a unanimous 12-0 vote, the Federal Open Market Committee (FOMC) hiked its benchmark interest rate a quarter point to between 3.75 percent and 4 percent, noting continued inflationary pressures that have been compounded by the war in Iran. The move followed five straight rate holds and marked the central bank’s first time increasing borrowing costs since July 2023.

The Fed also released its updated quarterly “dot plot” matrix of individual committee members, which signaled an additional rate hike later this year would likely be supported by 16 of 18 FOMC participants. Fed Chairman Kevin Warsh has not participated in the dot plot exercise since taking over the leadership post in June.

“The plain fact is that inflation is too high, and has been for too long,” Warsh said in a post-meeting press conference. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

The FOMC said it remains committed to maintaining the board’s long-standing inflation goal of a 2 percent annual rate, and that recent data put the rate well above this target. The Fed’s dot plot grid projected the federal funds rate at 4.1 percent for the end of 2026 and remain at that level through 2027. 

Since assuming the Fed chair post from Jerome Powell, Warsh has presided over two pauses and one rate hike in his first three meetings as Fed chair despite external pressure from President Donald Trump, who nominated Warsh in January.  In a Sept. 4 Truth Social post, Trump called on the Fed to cut interest rates or he would stop trading with certain countries. 

Joseph Fingerman, president of CRE at Peapack Private Bank & Trust, said elevated interest rates have slowed transaction activity with higher debt service costs reducing loan proceeds on deals. This has resulted in a widening gap between buyers and sellers while also requiring borrowers to contribute more equity.

Fingerman said that more interest rate hikes in late 2026 could keep refinancing coupons higher and widen the gap even further between property owners’ cash flows and debt service expenses, especially for rent-regulated multifamily properties where revenue growth is constrained.

“Across the industry, this would likely widen the divide between well-capitalized sponsors capable of contributing fresh equity and overleveraged owners facing maturity challenges,” Fingerman said. “For a fixed-rate lender like Peapack Private, that means underwriting new originations using higher stressed rates and stronger debt-service coverage cushions.”

The CRE industry got a reality check of higher long-term interest rates in the lead-up to Wednesday’s Fed meeting when the 10-year Treasury yield crossed the 5 percent threshold Monday and on Tuesday hit its highest level since 2007. 

Jay Neveloff, partner and chair of U.S. real estate at HSF Kramer, said that while interest rate hikes may affect some pricing a little bit, it will not deter the growing number of CRE investors he sees looking for deals in New York City and nationally.

“I see more and more land plays and potential assemblages that are being discussed and are being worked on,” Neveloff said. “I think for the smart investor who is not looking to stay on the sidelines the opportunity is still there, and I don’t think 25 basis points moves the needle.”

Neveloff added that it would be “a mistake” if Warsh opts to move forward with removing the Fed’s long-standing forward-guidance policy that has been often used by the CRE markets to interpret the central bank’s data when deciding whether to underwrite deals. He noted that forward guidance helps CRE market participants avoid “surprises” and provide more predictability or stability while pursuing transactions.

​Ryan Koehler, managing director for originations at NewPoint Real Estate Capital, said deals are taking shape far differently in 2026 than the past few years with more cash-in refinances, recapitalizations and basis-play acquisitions of distressed properties. Koehler noted that the elevated interest rate environment is also sparking more loan sales, with lenders also less willing to keep extending maturities. 

“We’re seeing a lot more lender-controlled transactions where equity has been substantially impaired or in many cases is completely wiped out,” Koehler said. “Lenders are done with kicking the can, and they are recognizing that the market today is a lot more challenging and they would prefer to deploy that capital elsewhere, so there’s more of a willingness to accept losses today than we’ve seen in the last five or six years.”

Andrew Coen can be reached at acoen@commercialobserver.com.