Impact of Fed Yield Curve Policy on CRE Markets

From Dislocation to Opportunity: The Maturity Wall & How Private Credit Is Stepping In As Banks Pull Back When the Federal Reserve raised rates by over 525 basis points during 2022–2023, the commercial real estate (CRE) sector came under significant pressure. Financing costs surged, and cap rates followed suit. Banks, which traditionally held nearly 50% of all CRE loans on their balance sheets (as shown in the first chart below), started dialing back their exposure. This retrenchment created a liquidity vacuum that Private Credit and the CMBS market have stepped in to fill. Despite the considerable volume of troubled loans still working through the system, the CRE property market is stabilizing, aided by the Federal Reserve’s shift toward a new easing cycle. In short, CRE is healing. However, a massive maturity wall and financing gap looms with over $1.5 trillion in CRE debt maturing by the end of 2026. This represents an unprecedented refinancing challenge. Marathon Asset Management, along with other credit managers equipped with strong CRE lending teams (sourcing, underwriting, structuring, asset management), will be incredibly active in the coming years. Our strategy has been two-fold: 1. In the $1T+ CMBS market: Capitalize on the fallout to acquire securities that are senior to the fulcrum tranche. With 1,600 securitizations and 9,000+ tranches, this highly inefficient and fragmented market offers opportunity for those with differentiated data, proprietary tech, and deep credit/asset-level insight to generate alpha and absolute returns. 2. In the broader CRE loan market (~5x the size of CMBS), my recommendation is to partner with world-class real estate sponsors, owners, and operators to originate loans backed by prime, well-located assets with stable cash flows and growth potential. As the CRE market recalibrates, those with deep real estate credit expertise, flexible capital, and relationship/strategic partnerships will be best positioned to lead this next cycle.

A heuristic people use when thinking about commercial real estate capitalization rates is adding some spread to the Ten-Year Treasury. But it is easy to do much better. Let me illustrate. Below are three models of cap rates for apartments in Los Angeles County based on Co-Star sales data for the years 2003-2025. All models have zip code dummy variable, taking into account differences in risk across zip codes that we hope are relatively constant over time. Each observation is a sale. While I am not usually a stars guy, for brevity, I use them here to summarize precision. The first model just uses the 10-Year Treasury and Building Size as explanatory variables (presumably larger buildings are more attractive to institutional investors, and so trade at lower cap rates). The three stars mean that the 10-Year is indeed an important predictor, but that building size is not significant. The second model adds the yield curve. We might think this would matter because commercial buildings need to refinance, and if investors think interest rates will rise in the future, they will need a higher current yield to be willing to pay for a building. Building size now seems to matter (although two stars are worse than three). But let's ask how much. The standard deviation of building size in our sample is 38,177 square feet. So a one standard deviation increase in size decreases the cap rate by....2 basis points. But look at the impact of the yield curve! Changes in forward expectations about interest rates have a larger impact on the cap rate than the current 10-Year treasury!. I should note, however, that the yield curve is less volatile than the 10-year. Finally, let's add a measure of inflation expectations. I take the breakeven inflation expectations rate, the difference between 10-year Treasuries and 10-year TIPS. Sure enough, higher inflationary expectations lead to lower cap rates, reflecting expectations about future rent growth. I am not an R-squared guy usually, but in this instance, it changes so much between model one and model two that I can't help but believe that adding the yield curve makes for a better model. The impact of adding inflationary expectations seems marginal for the model as a whole, but the coefficient is measured with great precision, and so I can't ignore it. If anyone with access to CoStar data wishes to reproduce what I did, I would be happy to share my code. And my great econometrics teachers would be most unhappy with my use of stars and R-squared, but I think they are appropriate here.

The Fed just cut its benchmark Fed Funds rate by 25 bps to 3.75%–4.00% and pivoted on the balance sheet. Starting December 1st, Treasury runoff will stop (those maturities will be rolled). MBS runoff will continue, with those proceeds being reinvested into Treasuries. In plain terms: balance-sheet shrinkage ends, and the mix shifts further towards Treasuries.   As shown in the chart below, shorter-term Treasuries have already rolled off more quickly in recent years from the Fed's portfolio, leaving the Fed overweight longer-dated Treasuries (which is consistent with remarks that Powell made at NABE earlier this month). Powell noted that they'll gradually pivot back toward a more neutral (shorter) mix over time.   So what does today's Fed announcement mean for CRE? Floating-rate loans: These are typically priced off of some spread above SOFR and Prime rates, and both of these will drift lower with the Fed Funds policy cut. Fixed-rate loans: These are typically priced off of either 5-year or 10-year Treasury yields. Ending Treasury runoff could ease long yields a bit, narrowing 5-10 year Treasury spreads. But since reinvestment are aimed at T-bills (shorter term), rather than longer bonds, don't expect a big QE-style drop. Call this an incremental easing rather than any sort of major turning point.    #FOMC #FederalReserve #InterestRates #CRE #Mortgages

For nearly eight decades, investors have assumed one stabilizing truth: the Federal Reserve sets policy independently of politics. That assumption has been jolted (again) this week as POTUS attempts to fire a sitting Fed Governor, a move that tests the very architecture of U.S. monetary policy. This is not a headline to skim past. For commercial real estate, the implications cut to the foundation of how we underwrite deals. Why it's good for real estate: • If the Fed bends to political pressure, short-term rates could fall faster than fundamentals justify. Floating-rate debt, bridge financing, and construction loans would all get cheaper. • Sponsors with looming maturities would get relief, refinancing at lower coupons could extend runway and prevent forced sales. • A dovish tilt may also loosen regulatory oversight. Banks and alternative lenders could regain appetite, driving liquidity back into development and value-add strategies. • In inflationary periods, real estate has historically been viewed as a hard-asset hedge. For some, moderate inflation combined with cheap credit is the perfect backdrop for CRE. Why it's bad: • Markets are reacting: while two-year yields fell, the 30-year jumped to 4.94% - the widest gap in years. That steepening curve reflects lost confidence in the Fed’s ability to anchor inflation. For CRE, higher long-term yields translate directly into higher cap rates and lower valuations. • Inflation risk is not theoretical. Politicized central banks (i.e. Turkey) often see sustained inflation, eroding real returns and putting tenants under strain as real incomes falter. That filters directly into rent concessions, defaults, and repricing across sectors. • A weaker dollar compounds the problem. International capital, historically a key bid in trophy office, multifamily, and logistics, may hesitate when currency risk and institutional stability are in question. • Fed control extends beyond rates. If political appointees dominate the Board, they influence regional Fed presidents, regulatory policy, capital requirements, and emergency liquidity facilities. In a future downturn, CRE sponsors may not be able to count on the same backstops that stabilized markets in 2008 and 2020. The challenge for sponsors today: Whichever camp you fall into, seeing this as a liquidity-driven opportunity or as a structural risk, how much weight are you giving to the other side when you underwrite? • If you’re counting on lower rates to fuel activity, how are you protecting investor capital if long-term yields continue to climb and cap rates widen? • If you’re bracing for valuation pressure, are you ignoring opportunities created by near-term liquidity and credit expansion? In other words: underwriting today requires more than a rent growth forecast. It requires scenario planning around the very foundation of U.S. monetary policy and deciding how much of that risk you can, or cannot, pass on to your investors.

A bumpy road ahead: The trouble signs have been apparent for a while. This slow, inevitable trend is gaining ground, and the consequences are now at hand. In the world of commercial real estate, borrowing costs have surged, as 10-year Treasury yields rise and capital markets tighten. This dynamic is particularly troubling as CRE faces a wave of debt maturities, forcing many stakeholders to navigate higher interest rates just to stay afloat. The pressure also extends to valuations, as higher yields drive up cap rates and reduce property values and owner's equity. The bond market's broader message to the economy is it is approaching its growth limits. For CRE, this creates a precarious situation. The Fed's potential rate cuts this year may provide some short-term relief, but higher yields driven by inflationary policies and global tensions suggests longer term challenges are ahead. Higher borrowing costs without accompanying economic growth result in compressed margins for CRE owners and developers, leaving less room for error. For commercial real estate to navigate these headwinds, stakeholders must prioritize resilience: - Pursue capital structures with lower leverage. - Target markets and asset classes with strong demand fundamentals. - Diversify into defensive strategies, such as private credit. Ultimately, the CRE industry's ability to adapt will determine its performance amid rising yields, but significant recalibrations in valuations, financing and investment strategies will likely make the road ahead bumpy. Peachtree Group Peachtree Group Credit James Mackintosh Jared Schlosser Michael Ritz Brian Waldman Brent LeBlanc Michael Harper Daniel Siegel #cre #commercialrealestate #privatecredit #multifamily https://lnkd.in/gzmdJpt5