by Rachel L. Richardson

Federal Funds Rate and Credit

Credit tightening describes a reduction in the amount of credit available for borrowers and is a phenomenon we’ve been experiencing since March 2022 amid economic uncertainty and the change in the Federal Reserve’s (the Fed’s) policy.

Banks have restricted their lending, demanding lower loan-to-value (LTV) ratios, thereby causing investors to hold off on acquisitions or put more cash down. The funds they do borrow to complete a purchase have higher interest rates—a result of the Fed’s effective federal funds rate (EFFR) hikes during this timeframe.

In July, the Fed increased their EFFR by another 25 basis points (5.25%–5.5%), marking the 11th rate increase since March of 2022 and bringing it to a high not seen since its previous peak(s) in 2006 and 2007.

In the July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), respondents reported “tighter standards and weaker demand for all commercial real estate (CRE) loan categories” with the expectation that “a less favorable or more uncertain economic outlook” through the latter half of 2023 will prompt sustained credit tightening in all sectors. The survey also queried its participants on their views of the current credit environment as compared to the midpoint of their range in credit standards between now and 2005.


  • The Fed increased their overnight rate (EFFR) by another 25 basis points in July and signaled that data will drive their actions in the remainder of the year.
  • Banks have been tightening their credit and loan officers anticipate continued tightening across all sectors through the end of the year.
  • Tighter credit conditions pose a challenge for commercial real estate, particularly for refinancing of the many loans soon to reach maturity.
  • In such a highly variable and uncertain economic environment, investors will be keeping an eye out for opportunities, placing an even greater emphasis on data-driven decision making.

Respondents shared that the current credit environment is on the tighter side of that range.


Image Source: Fred Economic Data | St. Louis Fed

Impact of Credit Tightening on CRE

In a tighter lending environment, banks reserve their loans for only the most credit-worthy borrowers, seeking to underwrite less risky loans. A challenge here is that the refinancing options become constrained. Investors may need to inject more capital into their assets to complete a refinance, and they may be forced to sell assets to accomplish this.

These forced asset sales can lead to transactional evidence for price declines, perpetuating the cycle of negative market growth.

Price discovery has been a widely discussed topic in this first half of 2023, as both the dollar and transaction volume of CRE sales has experienced a marked decline year over year. Of course, the first half of 2022 still carried noteworthy deal momentum as investors scrambled to allocate excess liquidity while interest rates were still near historic lows. The volume of these sales and elevated property valuations do exacerbate the year-over-year declines we are currently witnessing.

Still, the upcoming wave of loan maturities for CRE (an estimated $1.5 trillion over the next three years, according to Trepp) combined with the likelihood of constrained credit, is a concern to many market participants. Because commercial real estate mortgages often have an amortization period longer than the life of the loan, borrowers primarily pay interest during the loan term and must make a larger payment (a balloon payment) at its end to cover most of the loan principal. In a weakened economy with declining property values, maturing loans can cause a significant burden on CRE property owners who have a lack of liquid capital and an outstanding loan balance greater than the current market value of their property.

While CRE transactions have slowed across the board, their decline is most acute for Class A commercial assets. These are typically purchased by institutional investors rather than private investors, and these investors have been taking a wait-and-see approach as the Fed continues to raise its rates in response to inflation.

Private investors have increased their share of overall transaction volume in the first half of the year and will likely be keeping an eye on opportunities in the emergence of distressed assets when so many enter refinancing negotiations.


In its latest meeting, the Fed neither foreshadowed upcoming increases nor indicated they would dispense with the increases in their remaining meetings this year, saying instead that they would be looking to the data to determine their next moves.

Should the Fed enter a holding pattern, investor and consumer sentiment would likely be positive, and it may signal less need for increased credit tightening over the last half of 2023, bringing some stability to CRE markets nationwide. If not, and credit continues to tighten, it will pose continued challenges for the CRE market, particularly in the face of the upcoming loan maturities.

Investors, appraisers, and other market participants will continue to keep an eye on CRE transactional data and economic metrics, such as inflation and employment, as we assess the changes in the market.

With such highly variable market conditions, there is both great challenge and opportunity at play—placing an even greater emphasis on data-driven decisions.