Commercial Real Estate Lenders Adapt to Higher-Forever Rates

Commercial real estate lenders entered 2026 with hopes of lower interest rates. Stubborn inflation compounded by a war with Iran quickly ended those dreams.

The Federal Reserve raised its benchmark interest rate a quarter point on Sept. 16 to between 3.75 percent and 4 percent, marking the central bank’s first time hiking short-term borrowing costs since July 2023. The Fed cited inflation levels that remain well above its 2 percent target. Even before the September Federal Open Market Committee (FOMC) meeting, the CRE industry got a preview of higher-for-longer interest rates when the 10-Year Treasury yield crossed the 5 percent threshold on Sept. 14 and hit its highest level since 2007 the next day. 

Fed governors paused rates during the Oct. 28 FOMC meeting, yet the committee’s dot plot grid released in September signaled one more rate hike by the end of 2026, with the federal funds rate remaining at around 4.1 percent through the end of 2027.

The FOMC under new Fed Chair Kevin Warsh continues a hawkish strategy fighting inflation heading into 2027, echoing a policy established in early 2022 by his predecessor, Jerome Powell.  As a result, CRE lenders are adopting various strategies to cope with the challenges of higher borrowing costs facing property investors.

“We’ve become more defensive in our approach,” said Jai Agarwal, president and chief operating officer at Dwight Investment Management, an affiliate of Dwight Capital. “With the volatility we’ve seen, we’re running more scenario analyses to make sure every deal holds up across a wider range of rate and valuation outcomes.” 

Agarwal added that elevated interest rates should bolster appeal for Dwight’s bridge loan platform with borrowers more “hesitant” to lock in long-term debt such as commercial mortgage-backed securities (CMBS) that are priced based on the day’s Treasury rates.

Steve Caldwell, head of large loan CMBS at Wells Fargo, said expectations of elevated interest rates remaining mean it is “back to basics on credit work” with the shift prompting more thoughts about valuation, leverage and property sectors with cash flow characteristics. Caldwell noted that a lot of time is spent determining where investors “will continue to have appetite,” in terms of “collateral quality” and its “resilience through cycles.”

The higher interest rate climate is causing lenders to be more selective about where they deploy capital. That means sharper scrutiny of sponsors, properties and business plans.

“Elevated rates create challenges for borrowers through higher debt costs and lower proceeds, but they also allow lenders to generate attractive risk-adjusted returns,” said Chris Duey, senior managing director at Principal Asset Management. “Higher rates also reinforce the importance of cash flow and execution, so we are placing greater emphasis on assets with durable NOI, realistic lease-up assumptions and clear paths to value creation.” 

Tony Fineman, head of originations at Acore Capital, said projections for higher-for-longer interest rates have not altered its lending strategy much since it has been planning for this type of environment for a while. He said ACORE has been “disciplined” with its underwriting standards and “very selective” of late  when determining which loans to tackle. 

“We will not pursue a deal unless we are confident that it works with some level of cushion to today’s interest rates,” Fineman said. “We remain focused on sponsors with good track records and financial wherewithal, who are investing a meaningful amount of cash subordinate to our loan; best-in-class properties, often at materially reset bases; and markets that continue to exhibit positive trends and where investment is encouraged.” 

Jason Kollander, head of real estate credit at BDT & MSD Partners, said underwriting in late 2026 is made with the assumption of interest rates remaining elevated while building in a margin of safety for exit value. He said in today’s market “equity-like diligence” is needed when approaching transactions to ensure underlying assets, markets and sponsors have strong fundamentals. 

“We are focused on debt service ratio cushions, protecting against rate volatility through hedges, and being realistic about residual exit values to drive refinancing,” Kollander said. “We’re also focused on sectors where underlying fundamentals support returns, including industrial, higher-end residential and hospitality.”

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