A soft landing for the economy looks increasingly likely – and while that’s good for consumers, it’s not such a strong outcome for commercial real estate prospects, Friedman said. “Once the Fed is done reducing rates over the next 12 to 18 months… the federal funds rate is probably going to end up somewhere north of 3%,” he explained, “and that’s still going to be three times higher than where it was in the decade pre-2022.
“The 10-year Treasury rate is most likely going to stay somewhere well into the mid-threes to low fours as a percentage. In the decade [before] 2022, it averaged closer to 2%, so the 10-year Treasury rate is going to be almost double where it was.”
That’s significant because a much higher rate means substantially higher cash flows required to recalibrate to the new environment, he added. “I don’t think we’re headed towards a great financial crisis or anything like that, but I do think we’re headed for a harder economic environment for commercial real estate where the environment’s going to be much more sluggish.”
What’s more, while the Fed’s cut grabbed headlines, 10-year Treasury bonds climbed higher in the immediate aftermath – meaning mortgage rates have actually jumped despite the Fed’s move.
Which lenders are seeing potential in the current market?
Still, the challenges at play in the commercial space are presenting opportunities for non-traditional lenders because of the growing reticence of regional, community, and national banks to fund deals.