The Federal Reserve’s recent shift towards easing monetary policy sent a long-awaited ripple of enthusiastic across the commercial real estate (CRE) landscape, sparking new opportunities and challenges for both appraisers and lenders. With interest rates playing a critical role in determining property values and loan terms, professionals in these fields are digesting this softening of financial conditions and what it means for the near-term CRE forecast.
Candi Coleman, MAI and head of Lender Strategy at LightBox and a seasoned expert in CRE appraisal, shared in the CRE Weekly Digest podcast, “Appraisers and lenders are approaching the recent rate cuts with a grounded mindset, as they typically adopt a more conservative stance.” She noted that many of her peers didn’t anticipate a major shift in the market because the broader impact of the Fed’s actions has been anticipated and factored into ongoing transactions.
Here’s what’s top of mind from a lender and appraiser’s perspective.
Lenders: A Focus on Risk Mitigation
Coleman shared that for lenders, the interest rate cut presents a mixed bag. “On the one hand, lower rates can stimulate borrowing and drive demand for commercial properties, particularly in sectors like industrial and multifamily housing.” However, Coleman pointed out that lenders are approaching this new landscape with caution.
“Lenders are more focused on risk mitigation and debt service coverage now than ever before,” she explained. “The rate cut is beneficial in terms of lowering borrowing costs, but it also means we need to be more diligent in assessing the financial health of borrowers and the sustainability of property values over time.”
This heightened caution is especially true in sectors that have been more volatile, such as office space. “If someone comes in with a deal and it starts with “O”, lenders are apprehensive,” Coleman stated. “Office is certainly not the darling that it once was in the investment world, but there is a silver lining there because I also hear that there is more activity now on the leasing side,” she noted.
Research Director at LightBox, Dianne Crocker, added: “It is tough to paint the office sector with a broad brush because it is so nuanced and there are some positives coming from the sector. Stronger leasing activity as major employers ink deals for new office space is an early sign of stabilization that will improve vacancy rates, although the sector is not without its challenges particularly for assets carrying a high debt load.”
Appraisers: Valuation Challenges Amid Low Transaction Velocity
For appraisers, the interest rate cut brings its own set of challenges. Coleman noted that appraisers are now faced with the difficult task of reconciling historical data with current market conditions. Property valuations, which depend heavily on comparable sales data, have become harder to pin down in markets with low transaction velocity and rapidly changing financing terms.
“The interest rate cut has created a more complex environment for appraisers,” Coleman stated. “They now have to factor in not just the lower cost of capital, but also the potential long-term impacts of inflation and future income streams. It’s a balancing act between short-term benefits and long-term risks.”
Appraisers are also paying closer attention to the capitalization rates, which could shift in response to lower borrowing costs. These changes could have a significant impact on how properties are valued, especially in markets that are already seeing high demand and rising prices.
Coleman noted that appraisers are now grappling with the challenge of understanding the true market price versus perceived pricing, especially as concessions and seller motivations come into play. “Whether sellers are distressed or engaging in typical arm’s-length transactions, appraisers must perform rigorous due diligence to accurately assess property values,” she said.
Another factor top of mind for appraisers is the growing scrutiny around appraisal bias. This issue has been receiving significant media attention and carries reputational risks for both appraisers and lenders alike. As Coleman highlighted, the rise in public awareness has led to increased educational requirements and tighter scrutiny from bank examiners. “Appraisers are actively working to address these concerns, and the heightened focus on this topic has been evident in industry discussions. In fact, a recent blog on the LightBox insights page about appraisal bias has become one of their most popular posts, underscoring the importance of this issue.”
Inflation and Long-Term Market Stability
One of the key concerns shared by both lenders and appraisers is the potential for inflation to erode the benefits of the rate cut. While lower rates can stimulate economic activity in the short term, there’s a growing fear that inflationary pressures could lead to higher costs for construction, labor, and materials—factors that ultimately impact property values and loan performance.
“Lenders and appraisers are keeping a close eye on inflation,” Coleman emphasized. “There’s an understanding that if inflation gets out of control, it could negate the benefits of lower borrowing costs and create instability in the market.”
Looking Ahead: A Cautious Optimism
Despite these concerns, both appraisers and lenders, like the rest of the CRE market, are cautiously optimistic as the fourth quarter gets underway. Rate cuts often move capital off the sidelines and offer incentives for new lending and investment opportunities as lenders re-engage coming out of a downturn. For appraisers, the key will be adapting to these new market conditions and continuing to provide accurate, well-supported valuations. For lenders, it’s about maintaining strong underwriting practices and a risk-averse stance while remaining competitive.
As Coleman concluded in the podcast, “There’s no doubt the rate cut is a game-changer, but it’s not a silver bullet. The market is still adjusting, and the decisions commercial real estate participants face now make now will have long-term implications.”
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