How the Fed Interest Rate Affects Commercial Mortgage Rates (But Not How You Think)
Terrydale Capital
Sep 29, 2025 12 Min read
How the Fed Interest Rate Affects Commercial Mortgage Rates (But Not How You Think)
When the Federal Reserve announces a rate hike or cut, it makes headlines. And the first thing many commercial real estate investors think is: How will this affect my mortgage rate?
But here’s the thing. While the Fed's interest rate influences the economy, it doesn’t directly determine commercial mortgage rates. Not even close.
In this article, we’ll break down how the Fed interest rate affects commercial mortgage rates, why the connection is indirect, and what actually moves rates on loans for office buildings, apartments, retail centers, and other CRE assets.
If you’re a borrower, lender, or investor in commercial real estate, understanding this could save you money—and help you time your deals better.
What Is the Fed Funds Rate?
Let’s start at the top.
The Federal Funds Rate is the interest rate at which banks lend money to each other overnight. The Federal Reserve sets a target range for this rate to influence monetary policy—either to cool inflation or stimulate growth.
So when you hear “the Fed raised rates,” it means the Fed is tightening policy by making borrowing more expensive for banks. Conversely, when it cuts rates, it’s trying to ease borrowing conditions.
But here’s the key point: the Fed Funds Rate is a short-term rate—overnight, in fact.
What Is a Commercial Mortgage Rate?
A commercial mortgage rate is the interest rate charged on a loan used to buy or refinance commercial property. This could be an office building, multifamily complex, retail strip, warehouse, or hotel.
These loans are often:
5 to 10 years in term (sometimes more)
Fixed or hybrid adjustable
Priced based on long-term interest rates, plus a risk spread
So commercial mortgage rates depend heavily on longer-term Treasury yields, like the 5-, 7-, or 10-year Treasury. They also include credit spreads to account for property-specific risks, borrower strength, and market conditions.
Do Fed Rate Changes Directly Change Commercial Mortgage Rates?
No.
That’s a common myth. People think a Fed rate hike automatically raises mortgage rates, and a Fed rate cut drops them. But commercial real estate doesn’t work like that.
Here’s why.
1. Fed Controls Short-Term Rates. Mortgages Are Long-Term.
The Fed sets overnight borrowing rates. Commercial mortgage rates, by contrast, reflect multi-year lending risk.
So if you’re taking out a 10-year fixed loan on an apartment building, your rate is more likely tied to the 10-year Treasury yield, not the Fed Funds Rate.
Even websites like Select Commercial note that most commercial mortgages are priced off longer-term Treasury benchmarks—not short-term Fed rates.
2. Lenders Add Spreads That Change Independently
Commercial mortgage rates = base rate + lender spread.
The base rate is often a Treasury or swap rate.
The spread depends on:
Loan-to-value ratio (LTV)
Debt service coverage ratio (DSCR)
Property type and location
Borrower strength
Market risk
Even if the Fed cuts rates, lenders might keep spreads wide if they think the property risk is high or if capital markets are tight. And sometimes spreads narrow even when the Fed hikes rates—because investor demand is strong.
3. Markets Anticipate the Fed
Sometimes mortgage rates move before the Fed does anything.
How? Because the bond market is forward-looking. Investors try to price in what the Fed will do, not just what it has done.
So by the time the Fed officially cuts or hikes, Treasury yields—and therefore commercial mortgage rates—may have already adjusted.
4. The Fed Affects Liquidity and Credit Availability, Not Just Rates
What the Fed really controls is financial conditions:
Is capital flowing easily?
Are banks and investors willing to lend?
Is credit risk priced high or low?
These conditions matter just as much—sometimes more—than raw interest rates. When the Fed tightens, banks may lend less. That reduces availability of capital for commercial real estate, which can raise borrowing costs.
Even if Treasury yields don’t move, a lender might increase spreads or tighten loan terms.
Real-World Example: Fed Cut ≠ Lower CRE Mortgage Rates
Let’s say the Fed cuts its rate by 50 basis points.
You might assume your CRE mortgage rate will drop too.
But suppose investors get nervous about inflation. The 10-year Treasury yield rises. Suddenly, even with the Fed cutting, your mortgage rate could go up—because it’s tied to the 10-year yield, not the Fed Funds Rate.
This has happened multiple times in the past. Mortgage rates don’t always follow the Fed.
When Does the Fed Actually Affect CRE Mortgage Rates?
Here’s how Fed actions influence commercial mortgage rates indirectly:
1. Moving the Yield Curve
The Fed can influence longer-term Treasury yields by shaping market expectations about inflation, growth, and future policy.
If the Fed signals it will keep rates low for years, the entire yield curve may fall—pulling down the base rate for CRE loans.
But if the Fed is seen as behind the curve on inflation, the long end may spike—even if the Fed is cutting.
2. Risk Appetite
Low Fed rates push investors to seek higher returns. That can bring capital into commercial real estate debt, tightening spreads and lowering rates.
When the Fed tightens, the opposite happens: risk appetite falls, and spreads widen.
3. Liquidity
Loose Fed policy increases overall liquidity in the financial system. That can lead to more aggressive lending and lower borrowing costs.
Tight Fed policy restricts liquidity, and lenders get more cautious.
So What Should Borrowers Do?
If you're planning a loan or refinance, don’t just watch the Fed.
Instead, monitor:
The 10-year Treasury yield or 5-year swap rate
Spreads offered by lenders
Investor capital flows into CRE debt markets
And work with a team that understands how to structure and price deals in real time.
Where to Get Live Commercial Mortgage Rates
At Terrydale Capital, we help clients navigate all the moving parts of commercial real estate finance. We work with a broad network of lenders and structure deals to maximize leverage, minimize cost, and close on time.
To see real-time rates and deal flow, check out Terrydale Live. It’s a transparent window into how lenders are actually pricing CRE loans today—not what the Fed says.
Whether you’re buying, refinancing, or just exploring options, understanding how rates are formed—and where they’re going—can help you make smarter moves.
Final Thoughts
Here’s the simple truth:
The Fed doesn’t set commercial mortgage rates. But it helps shape the world in which those rates are made.
The best borrowers—and lenders—understand this. They watch the Fed, but they watch the long-term bond market more closely. And they work with the right partners to structure deals that match market conditions.
So next time someone says, “The Fed cut rates, so mortgages will be cheaper,” you’ll know better.
They might. But only if the rest of the market moves with them.
For real-time commercial mortgage rates and expert deal structuring, visit Terrydale Live and partner with Terrydale Capital—where strategy meets execution in commercial real estate finance.
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