October 01, 2025 — The decision by the U.S. Federal Reserve to cut interest rates at its September 2025 meeting is good news for commercial borrowers in more ways than one. Not only will the 25 basis point reduction in the Fed Funds Rate lower base rates on loans, but recent data also suggests that the prospect of additional Fed easing might influence lower spreads on floating rate commercial and industrial (C&I) loans, per the Q3 Commercial Lending Market Insight from Crisil Coalition Greenwich.

A comparison of the Fed Funds Rate and average SOFR spreads on new and renewed C&I loans suggests a potential relationship since the start of 2024. As the Fed cut rates in Q3 and Q4 of 2024, SOFR spreads contracted, falling from about 230 bps at the start of the year to just over 210 bps in Q4.

“Currently, the Fed’s dot plot is signaling that two additional rate cuts are in store for 2025,” says Gregory Schneider, Director, Commercial Loan Analytics (CLA) at Crisil Coalition Greenwich. “Given recent history, if the Fed sticks to those plans, SOFR spreads on C&I loans could continue to experience some downward pressure.”
That pressure could be boosted by other factors, including an improvement in economic sentiment and increasing competition among banks for loan volumes.

A Nascent Recovery in CRE?
An uptick in newly originated and renewed commercial real estate (CRE) loans suggests demand could be recovering after an extended period of subdued activity within the sector. 
Data from the Federal Reserve Bank of St. Louis (FRED) illustrates that the overall portfolio of U.S. CRE loans from large domestically chartered commercial banks has been shrinking since Q1 2023, as banks allow existing CRE loans to run off their books amid continued stress on office real estate and heightened regulatory scrutiny.

However, sales data from CLA shows that originations and renewal volume on CRE loans have increased in four of the last five quarters. Growth in the CRE business has been driven primarily by new originations in the multi-family and industrial property spaces, although retail also saw growth in the first half of 2025. In the troubled office segment, new originations rebounded strongly in first half of 2025, but renewal volume continued to trend downward.

“This growing demand for CRE loans suggests that borrowers may be becoming more comfortable taking on new CRE debt and have been actively seeking financing for real estate projects,” says Steve Boyle, Lead Analyst, Commercial Loan Analytics at Crisil Coalition Greenwich. “This new CRE business is beginning to counteract the runoff of existing CRE exposure.”

As observed in the C&I space, a decline in average CRE SOFR spreads could be impacted by both Fed rate cuts and heightened competition among banks. CLA data shows that spreads on SOFR-based CRE deals have trended downward since Q1 2024, driven primarily by a drop in spreads on multi-family deals. Another indication of increased competition can be seen in the slight downward trend in upfront fee pricing, where upfront fee levels have decreased by about 10 basis points year over year, with a gradual trend downward over the last six quarters overall.

Loan and fee pricing are two levers banks can pull in order to win deals, and with both of these metrics gradually trending downward since last year, paired with the new deal growth observed in CRE lending, banks seem to be more interested in competing and potentially gaining market share in the real estate space.

Commercial Lending Market Insight is a quarterly review of data and analytics from the CLA team at Crisil Coalition Greenwich.