Commercial Mortgage Rates: Spreads Flat Despite Fed Cut – January 2024 Update

Commercial mortgage rate spreads have remained largely stable in recent weeks, even after a 25 basis point reduction in the Federal Reserve’s rate in December. This stability comes despite shifting conditions in the Treasury market and evolving benchmarks for commercial real estate lending.

Navigating a Shifting Rate Landscape

As of data collected through December 5, 2025, the one-month term SOFR stood at 3.984%, while the 10-year Treasury yield reached 4.09%. Simultaneously, the 5-year Treasury was at 3.71% and the 5-year SOFR swap rate was 3.34%. The 10-year SOFR swap rate was 3.75%. LIBOR rates are no longer applicable, with both the 1-month and 3-month LIBOR listed as ‘n/a’.

Did You Know? The Secured Overnight Financing Rate (SOFR) has emerged as the primary replacement for the London Interbank Offered Rate (LIBOR) in commercial real estate lending.

Yields on both the five- and 10-year Treasuries have increased – by 14 and 17 basis points, respectively – while the one-month term SOFR decreased by 18 basis points during the same period. This has resulted in modestly increased interest rates for fixed-rate loans and decreased rates for floating-rate loans.

Potential for Spread Compression

Kean Thomas, vice-president of finance and development at Vestar, anticipates a potential for slight loan spread compression in the coming months. This potential is linked to the relationship between loan spreads and triple-B corporate bonds. According to Thomas, “Slight spread compression will translate into incrementally lower borrowing costs.”

However, uncertainty remains regarding the impact of potential movements in the federal funds rate and the 10-year Treasury yield on commercial real estate loan pricing. Thomas stated, “Our house view is that we shouldn’t count on too many more rate cuts. It’s never a good strategy. We’re going to continue doing what we’ve been doing, which is borrowing with good lenders at a low cost of capital.”

Expert Insight: The interplay between Federal Reserve policy, Treasury yields and SOFR creates a complex environment for commercial real estate borrowers, requiring a cautious and strategic approach to financing.

Some insurance lenders are shifting capital towards higher-risk investments, such as three- to five-year bridge loans on properties undergoing lease-up or facing short-term lease expirations, according to Ernie DesRochers, managing director at Northmarq Capital.

Looking Ahead

Loan pricing will ultimately be determined by how benchmark interest rates evolve. While the term of Federal Reserve Chair Jerome Powell is set to conclude in May, with a potential nomination of a successor favoring rate cuts, current market analysis suggests a reduced probability of an interest rate cut in January. DesRochers noted, “With the economy projected to show good growth in 2026, the likelihood of significantly lower mortgage rates this year has decreased as rate cuts by the Fed are less likely.”

Frequently Asked Questions

What is SOFR?

SOFR is the Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and is now the primary replacement for LIBOR.

What happened with Treasury yields recently?

Yields on both the five- and 10-year Treasuries rose, increasing by 14 and 17 basis points, respectively.

What is Kean Thomas’s outlook on future rate cuts?

Kean Thomas believes it is not a good strategy to rely on further rate cuts and that Vestar will continue borrowing from lenders at a low cost of capital.

How will these evolving economic conditions impact your commercial real estate investment strategies in the coming year?