Higher for Longer: Commercial Real Estate Rates Guide

For more than a decade, commercial real estate owners and investors operated in an environment of historically low interest rates. Cheap debt inflated asset values, compressed cap rates, and made almost any deal look serviceable on paper. That era is over. The Federal Reserve's campaign to tame inflation has pushed the federal funds rate to levels not seen since before the 2008 financial crisis, and the central bank has signaled that it does not intend to rush back toward zero.

The phrase "higher for longer" has become the defining macro theme for commercial real estate finance in 2025. Understanding what it actually means — and how to structure around it — is essential for any owner, operator, or investor active in the market today.

What "Higher for Longer" Actually Means

When economists and Fed officials say rates will stay "higher for longer," they are signaling that monetary policy will remain restrictive until inflation is durably back near the 2% target. The implication for commercial real estate is significant: the base rates that underpin mortgage pricing — the 10-year Treasury yield, SOFR, and swap rates — are unlikely to return to pre-2022 levels within a typical five-to-ten-year loan term. Borrowers who are waiting for rates to "come back down" before refinancing may be waiting a long time.

The Valuation Reset

Higher discount rates mean lower present values. For income-producing properties, this translates directly into cap rate expansion — and cap rate expansion, all else equal, means lower property values. A stabilized multifamily asset that traded at a 4.5% cap rate in 2021 might now clear the market at 5.5% to 6.0%, representing a meaningful decline in value even if the net operating income has grown. Owners who purchased or refinanced at peak valuations now face debt that may exceed current market value.

The Refinancing Cliff

Billions of dollars in commercial mortgages originated during the 2019–2022 low-rate environment are approaching maturity. Many of these loans were underwritten at rates in the 3% to 4% range, with debt service coverage ratios that looked comfortable at the time. When those loans come due and owners go to refinance at today's rates — which are 200 to 300 basis points higher — the same NOI can support significantly less debt. Owners may face the choice of paying down principal at refinance, selling, or negotiating a loan modification with their existing lender.

Strategies That Work in This Environment

Lock long-term fixed rates now. CMBS and SBA 504 loans offer fixed rates for 10 to 25 years. Owners who lock today remove rate risk from the equation for a decade or more. If rates do fall, most CMBS loans allow defeasance or yield maintenance payoffs that give borrowers an exit path.

Focus on cash flow, not appreciation. In a higher-rate environment, the underwriting emphasis shifts from cap rate arbitrage to actual debt service coverage. Properties that generate strong, stable cash flow — hotels with healthy RevPAR, multifamily with high occupancy, industrial with long-term leases — can still access capital. Properties dependent on future appreciation or rent growth to service debt will struggle.

Right-size your leverage. The era of 75% to 80% LTV deals is largely over for most asset classes. Lenders are underwriting more conservatively, and maximum loan proceeds have shrunk. Bringing more equity to closing — or accepting a smaller loan — is often the realistic path to closing a transaction today.

Consider assumable debt. CMBS loans are often assumable, meaning a buyer can take over an existing loan at its original fixed rate. In a higher-rate world, assumable debt at a below-market rate is a genuine competitive advantage when selling a property.

The Opportunity Hidden in Dislocation

Higher rates are painful for overleveraged owners, but they create opportunity for well-capitalized buyers and patient operators. Properties that need to trade due to loan maturity pressure or operational distress are coming to market at prices that would have been unthinkable two years ago. Investors with access to capital and the patience to underwrite conservatively are finding some of the best entry points in years.

First Realty Capital structures CMBS and SBA loans for borrowers navigating today's rate environment. Reach out to discuss how to position your next transaction for success at current market rates.

Frequently Asked Questions

Related reading: Fixed vs. Variable Commercial Mortgage Loans  |  Converting SBA Loans to CMBS