The Cut Never Came: What the Fed Hike Did to Your Deal

​Three weeks ago I wrote that you should not wait for an interest rate cut. On Wednesday the Federal Reserve raised its benchmark rate by a quarter point, to a range of 3.75% to 4%, in a unanimous vote, the first increase since July 2023. 16 of the 18 officials who submitted projections expect another increase this year. That is a projection, not a promise, but it is the rate path I would run in the model. The 10-year Treasury, which is where fixed-rate commercial real estate debt is priced, touched 5% last week, its highest since 2007.

After the further increase most officials expect, the median projection keeps that rate through next year. Higher for longer is no longer the risk in your model. It is the plan.

Here is what has not changed. Capital is plentiful. Banks are back in the market and have balance sheets to clear. The lenders who were quoting deals in August are still quoting them. If you want to test that on your own deal, ask your lender to refresh last month's quote and compare the rate, the spread, and the proceeds. Sponsors want to do deals.

The money did not leave. The math changed. What follows is what the new math does in each of the 3 places you might be standing.

If you are acquiring, your exit cap rate just went up.

The exit cap rate is the yield a buyer will demand when you sell. When the cost of money rises, that yield rises with it, and the sale price falls even if the building's income never moves.

Take a property earning $1 million a year. At a 6% exit cap it sells for about $16.7 million. At 6.75%, it sells for about $14.8 million. Same building, same income, and about 11% of the value is gone.

Most deals that penciled in August do not pencil at today's exit cap. The return you underwrote came from the sale, and the sale is now worth less.

This is the question to ask before anything else: is that discount really a discount? A seller offering 10% off last year's price has not given you a bargain if the exit cap has moved from 6% to 6.75%. Re-run the exit first. Then decide whether the price is a discount or a catch-up.

If you are building, your refinance is the risk you may not have sized.

Construction loans usually have floating interest rates, so your interest carry is already rising, and that shows up in your monthly draw. That part you can see.

The part you cannot see yet is stabilization. The proforma that raised your equity assumed a permanent loan at the end, sized to the income the stabilized asset produces, at the rate that existed when you signed. Run it again at today's permanent rate. If the new loan is smaller than the construction loan it has to pay off, you have a gap, and the gap is yours to fill.

Three ways to guard that gap now, before it is a problem: commit the equity that fills it; enlarge the interest reserve so a slower lease-up does not force a bad refinance; or borrow less, so the permanent loan that pays off the construction loan still clears at a higher rate. Each one costs money today. A gap at stabilization costs equity.

If you are growing or raising capital, the market is about to reward a different kind of deal.

The distress that was postponed while everyone waited for rates to fall no longer has a cut to wait for. Owners, banks, and equity holders can now price the world as it is. That opens the buying window I wrote about on September 1.

But a window opening is not the same as a window opening for you. This market will favor 2 things: proven operators, and what I call middle-of-the-road deals. A middle-of-the-road deal is compelling because of what you paid and what it costs to run. The return works without aggressive rent growth, a lower exit cap, or a cheaper refinance. It carries a safe and respectable return, and an operator who has done it before is running it. It is not the deal with the big story and the big exit. That deal needed cheap money, and the cheap money is gone.

So what does this mean for you?

If you are a smaller operator, or one with a shorter track record, this is the time to partner with others who can strengthen your operation and your profile. I laid out how I do that last week. Capital in this market is going to the operator it can verify, and a partner gives you more credibility.

If you are an established operator, this is not the time to swing for the fences. It is the time to know exactly what your platform edge is, the thing you do better than the field, and to deliver deals that are predictable, safe, and underwritten in a way that builds trust. Not deals that secure the next check. Deals that give capital a result it can compare with what you underwrote, so the check after that needs no second pitch.

The operators who come out of this cycle larger will not be the ones who found the most distress. They will be the ones whose deals still worked when the cut never came.

-Damon

Damon C. Healey, Founder, Eternal Companies

Capital says yes to the operators it can check.

If your next deal, project, or raise has to work at today's rates, a Platform Edge Session gives you a straight answer on what is fundable and what is not, in 90 minutes.

​Book a Platform Edge Session | Get the 2026 IC Stress Test​

P.S. The Eternal Edge lands by email first, every Tuesday: eternalcos.com/the-eternal-edge​

​
​

​
​

​