If a September rate cut signals a downward trend in interest rates, that could help stalled projects start to gain some forward momentum. iStock illustration

A highly anticipated rate cut in September will help Massachusetts developments looking to refinance debt, but bankers don’t expect any immediate impact on loan pricing.

The Federal Reserve’s interest rate-setting board meets next on Sept. 16 and 17. Prominent board members like Christopher Waller have been advocating for a 25 basis point cut in September, but commentators interpreted an August speech by Fed Chair Jerome Powell in Jackson Hole, Wyoming as the clearest sign yet that the Fed’s benchmark short-term rate could drop slightly this month.

There hasn’t been a rate cut from the Federal Reserve since December of last year when the central bank put the brakes on a campaign to reverse its 2022-2023 rate hikes as inflation reared its head again.

Paired with rising inflationary pressures and economic uncertainty, the commercial real estate lending market has seen a slowdown.

“I think it’s certainly slowed down a bit with the increase in rates, the increase in construction costs,” said Paul Medeiros, director of commercial lending at Fall River-based BankFive. “It’s still relatively compatible to last year. It hasn’t changed a lot, because rates really haven’t done much since last year.”

Uncertainty Could Rein in Some

One stark contrast that exists in 2025 that didn’t exist in 2024 was the high levels of uncertainty caused by President Donald Trump’s tariff policies that are starting to increase costs across the board, not just for developers with construction projects that need imported lumber or other materials.

“I think we probably have more uncertainty, for example, property owners that own buildings that are leased to federal agencies, and what’s happening with those properties,” said Rick Muraida, director of commercial real estate lending at Hanover-based Rockland Trust. “So there’s challenges and uncertainties because of actions coming at the federal government level. There were some things [in this summer’s One Big Beautiful Bill Act] that positively impact the affordable housing market in terms of low-income housing tax credits and tax-exempt bonds, but there’s other things in there that are causing concerns.”

While interest rates have remained flat, the passage of time has helped bring buyers, sellers and their lenders closer on pricing.

The days of ultra-low interest rates before and during the COVID-19 pandemic in the rearview mirror, new projects and sales of existing buildings are accounting for today’s interest rates and high-construction-cost environment.

“That’s because sellers, buyers, everybody has put into the calculus higher cap rates and higher interest rates, and those are directly reflected in in the prices that the properties are trading for,” Hometown Financial Group CFO Matt Sosik said. “When we’re coming off of essentially 0 [percent] interest rates and there was like the shock and awe of, ‘Hey, cap rates are now not 4.5 [percent], they are 7.5 [percent] or 8 [percent], or higher.’ That was a real problem, because there was a big divide between buyers’ and sellers’ expectations, and banks and lenders in general.”

Today’s interest rates and high construction costs have causes a variety of problems for both bankers and buyers looking to finance deals.

Most notably, banks have increased their required debt service coverage ratios – the ratio of a borrower’s net income to their monthly loan payments – significantly due to rate environment.

“The cost of debt is much more expensive so now you need to be able to get higher rents to cover that,” Medeiros said. “Getting to that ratio is much harder, so it becomes more difficult.”

Rate Cut Already Priced In

If the anticipated rate cut does come to fruition, its effect on the market could be limited.

Observers say the bond markets that have the strongest influence on mortgage rates have already priced in expectations of a 25-basis-point cut this month.

Still, if a September rate cut signals a downward trend in interest rates, that could help stalled projects start to gain some forward momentum.

“Depending on what the market feels rates are going to do, and how far down they come, you may find projects that have been stalled because the rate of return and the cash flow just wasn’t there, that maybe those projects start to make sense,” Medeiros said. “So, we might see some additional activity in stalled projects coming back to life, because now rates are lower, and maybe it makes sense now.”

A single rate cut could be more of a psychological change than a sudden surge in dealmaking, Sosik said.

“I don’t expect to see cap rates falling. I don’t expect to see any real drop in interest rates on the CRE deal but when you cut interest rates and operating businesses have a clear path to lower cost, you generally lift the tide of commerce,” he said. “CRE will get a bounce from that, but it’ll be indirect.”

But that psychological impact could still help, Rockland Trust’s Muraida said, especially as the state of the economy is making banks want to be more cautious.

Sam Minton

Potential for a Refi Rebound

One area where bank executives do see the potential for increased activity is the commercial refi market.

Because Fed rate cuts primarily impact the short end of the yield curve, assets whose loan is coming to term are likely to be the main beneficiaries, Muraida.

“I think most of the refinancings that we’re seeing today are coming from loans that were originated a few years ago in a lower rate environment,” he said. “They’re having to deal with some rate shock anyways. So, to the extent that there’s some lowering of interest rates that might ameliorate that rate shock that loans may have as a result of return in this market.”

According to the Mortgage Bankers Association, 20 percent ($957 billion) of outstanding commercial mortgages held by lenders and investors will mature in 2025, up from the $929 billion that matured in 2024.

“The other thing I think we’ll see is the opportunity for refinancing,” BankFive’s Medeiros said. “There’s going to be an opportunity as developers and borrowers look to refinance that debt.”

If values increase, it can help projects reach a bank’s desired loan-to-value ratios, another commercial lending metric that’s toughened at many banks in recent years.