How Interest Rate Hikes Affect Commercial Real Estate

By Anthony A. Luna, CEO of Coastline Equity

Updated September 16, 2026

Higher interest rates can increase commercial property financing costs and reduce the amount an owner can refinance. The effect may appear at a loan reset or maturity rather than immediately after a Federal Reserve announcement. Rising rates are one factor the Office of the Comptroller of the Currency identifies as increasing commercial refinancing risk.

On September 16, 2026, the Federal Reserve raised its target federal funds range by a quarter of a percentage point to 3.75%–4.00%. That is the Fed’s policy range, not the interest rate available on a particular commercial property loan.

For an owner, the next step is to connect financing conditions to the property’s loan documents, income and upcoming lease decisions.

When will higher rates affect your property?

Start with when the loan’s interest rate can change.

A fixed rate remains fixed for its specified period. An adjustable rate follows the contract’s reset provisions. The relevant details include the index, margin, adjustment schedule and any applicable limits.

Ask for a loan summary showing the current balance, maturity date and payment structure. For variable-rate debt, include the next reset and any hedge or rate-cap expiration. For fixed-rate debt, identify when replacement financing will be needed.

The dollar effect is straightforward once those terms are known.

For a hypothetical $4 million interest-only loan, a full 0.25-percentage-point increase in the all-in rate adds $10,000 in annual interest expense, assuming the balance stays constant.

That is not an estimate of what every $4 million loan will cost after the Fed’s decision. It is the calculation to use when the loan’s actual rate changes by that amount.

Does a higher mortgage payment reduce NOI?

A higher interest payment reduces cash available to ownership, but it does not directly reduce net operating income. NOI is calculated before interest and principal payments.

This distinction belongs in the owner report.

If a property’s NOI is unchanged but its debt service rises, the owner needs to see a financing-driven change in cash flow. If NOI also declines, management should explain which revenue or operating-expense changes caused it.

I’d want the report to separate operating performance, debt service and capital spending. Without that separation, an owner can end up trying to solve a financing problem by making the wrong operating cuts.

How can higher rates create a refinance gap?

A lender may size a loan partly around the income available to cover its payments. The debt-service coverage ratio, or DSCR, divides NOI by annual debt service.

Consider this hypothetical refinancing scenario:

Lender-underwritten annual NOI: $500,000

Required DSCR: 1.25

Amortization: 25 years, with monthly payments

Those assumptions permit annual debt service of $400,000.

Illustrative interest rate Annual debt-service limit Approximate loan supported

5.00% $400,000 $5.70 million

6.00% $400,000 $5.17 million

7.00% $400,000 $4.72 million

With a $5 million balance due at maturity, the 7% scenario leaves approximately $284,000 to cover, before closing costs, reserves and other requirements.

The property’s income did not decline in this example. The financing assumption changed.

These rates are scenario inputs, not lending quotes or a forecast of how commercial loan rates will respond to the September 16 decision. The example also isolates debt-service capacity. Loan-to-value limits, debt-yield requirements and other underwriting criteria could support a lower loan amount.

How do higher rates affect commercial property values?

Interest rates and capitalization rates are different measures. A change in the Fed’s policy rate should not be applied mechanically to a property’s cap rate.

Under a simplified direct-capitalization calculation, value equals stabilized NOI divided by the capitalization rate. Holding NOI constant, a higher cap rate produces a lower indicated value.

For example, $500,000 in stabilized annual NOI implies:

$10 million at a 5% cap rate.

Approximately $8.33 million at a 6% cap rate.

That is a sensitivity calculation, not a forecast for a Los Angeles, South Bay or Inland Empire property.

Before updating a valuation, ask for support for the cap rate and the income assumptions. Then compare the resulting value with the loan balance and the lender’s proposed terms.

The question is whether the owner’s financing plan still works, not whether a national headline suggests that every building should be marked down by the same amount.

What could happen to commercial tenants?

The Fed influences the availability and cost of credit, which can affect business investment and household spending. Those effects are not direct or immediate, and interest rates are only one influence on economic activity.

For a commercial owner, the practical implication is to ask better questions during leasing and renewal discussions.

A tenant considering another suite may also need to finance equipment and improvements. A business may prefer a smaller expansion or different timing. Those are possibilities to investigate, not conclusions to assume about every tenant.

I’d compare any proposed concession with the full alternative: potential downtime, leasing costs, improvements and the timing of the property’s own obligations. A rate headline alone is not enough reason to approve or reject a request.

What should owners do before the next refinance?

Put the loan maturity beside the lease expirations. Review both on one forward-looking schedule. Identify income that could turn over near the financing decision, along with renewal deadlines and planned capital work.

Ask for current lender feedback. Request an indication of likely proceeds, required reserves and material conditions. Compare the estimate with the projected payoff, rather than comparing only the new interest rate with the old one.

Test a less favorable case. Keep the assumptions visible. A higher borrowing rate, a period of vacancy or an expense increase should be a labeled planning scenario, not presented as a prediction. The OCC identifies multivariable stress testing as a way to evaluate refinancing capacity under changing conditions.

Decide what capital is available. Ownership should know what cash can be retained, contributed or raised if the replacement loan does not cover the payoff. Ask about alternatives early enough to evaluate them without a maturity deadline dictating the choice.

What should property management contribute?

Management should supply records that make the financing discussion more reliable: a reconciled rent roll, supported expense recoveries, clear operating statements and a lease schedule that identifies upcoming decisions.

I would also ask for an explanation of any difference between reported NOI and the figure being used by the lender. Underwritten income and expenses may differ from the property’s accounting presentation.

Management cannot set market interest rates. It can make sure ownership is not evaluating a major financing decision with unresolved accounting questions or missing lease information.

For Southern California commercial owners, Coastline Equity’s Property Management Performance Review provides a starting point for discussing gaps in reporting, leasing, expense controls and owner communication.

Before the next refinance, the owner should be able to answer: How much debt is coming due, what financing could replace it, and what remains for ownership to fund?