What Moves a Commercial Mortgage Rate

Commercial mortgage rates move based on factors different from residential mortgage rates. Federal Reserve policy affects both but through different channels. Understanding what actually drives commercial rate pricing helps Macomb County borrowers time acquisitions and refinances better and evaluate whether current pricing reflects the specific deal risk or generic market conditions.

The base rate reference. Most commercial loans price off either the Treasury curve or the SOFR curve, depending on loan structure. Fixed rate commercial loans typically reference the 5 or 10 year Treasury for corresponding term. Variable rate loans typically reference SOFR or Prime rate. When the referenced index moves, all in commercial rates move by roughly the same amount, holding spreads constant.

The credit spread over the base rate. Lenders add a spread reflecting risk assessment. Property type, borrower strength, loan to value, DSCR, market conditions, and specific deal circumstances all affect the spread. Investment grade credit tenants on long leases might carry spreads of 175 to 250 basis points over Treasury. Higher risk deals carry spreads of 300 to 500 basis points or more. The spread is where lender differentiation happens beyond the underlying rate environment.

Federal Reserve policy. The Fed sets short term rates directly through the federal funds rate. Fed policy affects long term rates indirectly through inflation expectations and quantitative easing or tightening. Recent Fed tightening raised commercial rates significantly, moving Michigan rates from 4 to 5 percent in 2021 to 7 to 8.5 percent currently. Fed policy shifts typically move commercial rates within weeks.

The Treasury curve shape. When short rates exceed long rates, the curve is inverted. When long rates exceed short rates, the curve is normal. Commercial lenders watch the shape of the curve carefully because it affects term structure of their lending business. Inverted curves sometimes indicate expected economic weakness ahead, which can widen credit spreads even as base rates stay flat or decline.

Property type risk. Multifamily typically prices tighter than office. Industrial prices around multifamily levels. Retail prices somewhat wider than industrial. Special use properties like hotels, restaurants, and self storage price wider still. Automotive supplier properties in Macomb County can command wider spreads because of industry cyclicality. Property type affects the spread lenders add over base rates, sometimes by significant amounts between categories.

Borrower quality. Established borrowers with strong balance sheets, extensive commercial real estate experience, and clean credit history get better pricing. First time commercial borrowers pay premium pricing for the same properties. Borrower quality affects spreads by 25 to 75 basis points typically.

Loan structure choices. Longer amortization typically commands slightly higher pricing because it extends lender exposure. Interest only periods add pricing because they delay principal reduction. Non recourse structures on the rare deals where they exist command significantly higher pricing. Prepayment flexibility affects pricing. Yield maintenance or defeasance provisions typically produce better pricing than open prepayment.

Property specifics. Location within a market affects spreads. Macomb County core locations command tighter spreads than secondary or tertiary submarkets. Building age affects spreads. Newer buildings with modern systems price tighter than older buildings with deferred maintenance. Tenant credit quality affects spreads on single tenant properties significantly.

Market cycle position. During capital abundant periods, spreads tighten across the board as lenders compete for business. During capital constrained periods, spreads widen and some deal types stop trading entirely. Post 2022 tightening moved commercial lending toward the constrained end of the spectrum, widening spreads and shrinking loan sizes on the same properties.

The refinance timing decision. Owners approaching loan maturity should model refinance at current rates well in advance of the actual maturity. If current rates produce unacceptable DSCR or force property sale, options include starting sale process, extending existing loan through negotiation, or planning significant equity injection at refinance. Waiting until maturity forecloses options.

TDG Commercial, known as top commercial real estate agent in Macomb County, works with borrowers and lenders to structure financing that reflects current market conditions across the region.