Why Treasury Yields Matter More Than Fed Rate Headlines
Over the past several weeks, we’ve focused on how recent legislation, particularly the One Big Beautiful Bill Act (OBBBA), positively impacts commercial real estate. One of the most significant benefits is the expanded use of cost segregation combined with 100% bonus depreciation, which we believe is a game-changer for buyers and owner-users.
We recently explored this in detail in our discussion of cost segregation and bonus depreciation for commercial real estate. We’ll return to that topic soon with practical tools you can use. But first, it’s important to revisit another issue dominating commercial real estate decision-making: interest rates.
Why Everyone Watches the Federal Reserve
Interest rates have been front and center as the Federal Reserve concluded its recent annual meeting in Jackson Hole, Wyoming. Public pressure on Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) to lower rates has been intense.
The Fed’s benchmark Fed Funds Rate is the rate banks charge each other for overnight lending. While it directly affects only short-term interbank loans, it is widely viewed as a signal for where broader economic policy is headed.
In practical terms, the Fed Funds Rate signals policymakers’ views on economic growth, inflation, and risk, and markets react accordingly.
How the Fed Uses Interest Rates to Manage the Economy
The FOMC adjusts the Fed Funds Rate to influence the flow of capital:
- When the economy slows, rates are lowered to encourage borrowing and investment
- When inflation rises, rates are increased to reduce demand and cool the economy
Think of it like a throttle and brake system, the goal is a smooth, controlled journey, not sudden stops or accelerations.
However, the Fed Funds Rate primarily impacts short-term borrowing, not long-term debt.
Why Treasury Yields Drive Commercial Mortgage Rates
Changes to the Fed Funds Rate tend to influence short-term U.S. Treasury bills (4-week to 2-year maturities) much more than long-term Treasuries.
Commercial real estate loans are long-term instruments, so lenders look instead to the 10-year U.S. Treasury Note as their benchmark. Treasury yields are considered “risk-free” rates, and lenders add a risk premium on top to price commercial mortgages.
This relationship is critical when evaluating commercial mortgage rates for industrial and income properties.
How to Estimate Commercial Property Mortgage Rates
As a general rule of thumb, commercial mortgage rates are often priced at approximately 200 basis points above the 10-year Treasury yield. While this won’t be exact, it provides a reliable framework for estimating borrowing costs during underwriting.
Today’s environment includes:
- Inflation still above the Fed’s 2% target
- Record and rising federal budget deficits
- Increased perceived long-term risk among bond investors
As risk perception rises, so do required yields, which keeps long-term borrowing costs elevated.
What This Means for Buyers and Investors
Even if the FOMC begins cutting the Fed Funds Rate, commercial mortgage rates may not fall meaningfully until inflation is firmly under control and fiscal pressures ease.
This reality is shaping commercial real estate acquisition timing decisions for buyers who have been waiting on the sidelines.
For buyers hoping the Fed will quickly “save the day,” patience may be required. However, higher borrowing costs are now being partially offset by the tax advantages introduced under the OBBBA.
Why Tax Strategy Now Matters More Than Rate Cuts
While interest rates remain elevated, tax efficiency has become a critical lever in deal economics. Strategies like:
- Cost segregation
- 100% bonus depreciation
- Accelerated write-offs for improvements and equipment
can significantly reduce after-tax costs and improve cash flow, even in a higher-rate environment. These tools are already influencing industrial real estate investment strategy in today’s market.
Cost segregation paired with bonus depreciation is just the tip of the spear and we’ll dive deeper into how it works in upcoming posts.
Trying to Decide Whether Today’s Rates Still Make Sense? Let’s Run the Numbers.
If you’re evaluating a commercial property purchase, refinance, or expansion, understanding how interest rates and tax strategy work together is essential. A short discussion can help you assess real borrowing costs — not just headline rates.
👉 Talk to a Zehner Hill industrial real estate advisor