Rates Went Up Again. Our Rule Didn't Change.

On September 16, 2026, the Federal Open Market Committee raised the federal funds target range by 25 basis points, to 3.75%–4.00%, by a 12-0 vote. Its statement pointed to inflation that remains elevated (Federal Reserve, September 2026).

The Committee's median projection now has the federal funds rate at 4.1% at the end of 2026 and again at the end of 2027, up from 3.8% and 3.6% in June (Federal Reserve Summary of Economic Projections, September 2026). Those are projections by FOMC participants, not commitments.

Long rates have moved more. The 10-year Treasury yield was 5.15% on October 19, 2026, against 4.18% at the end of 2025, a rise of 97 basis points this year. It peaked at 5.31% on October 5 (U.S. Treasury; Ridgeline calculation).

Positive leverage means the interest rate on the loan is lower than the property's unlevered yield going in. When that holds, debt adds to cash yield from day one. When it does not, the investment depends on future rent growth to work.

Jeff Axley, Managing Principal, Ridgeline Capital Partners, frames the test this way: "...there's still positive leverage meaning you know, the interest rate on your debt is less than your unlevered yield going in. So you have positive cash on cash yield and you're not trying to grow your way out of it through like projected rent growth that may or may not happen."

The margin for that test has narrowed. CBRE reports an average MOB cap rate of 7.1% in 2Q 2026. Against the 10-year Treasury, that is a spread of 266 basis points on June 30 and 195 basis points on October 19 (CBRE, 2Q26; U.S. Treasury; Ridgeline calculation). Cap rate readings differ by source: Cushman & Wakefield puts the H1 2026 average at 6.8% (Cushman & Wakefield, H1 2026). We use CBRE's figure because it pairs with the same-quarter Treasury data.

Other investors we speak with describe the same discipline. Buyers are not accepting negative leverage, and pricing on value-add deals has tracked the cost of debt closely.

Lenders size medical office loans on coverage, not on what a sponsor hopes a building will earn. Jeff describes the process: "...we get, we obtain half a dozen loan quotes on each, at least on each deal. Lenders are sizing their loan based on the debt coverage ratios and debt yield requirements that they need to have..."

In practice, that means borrowing less than the maximum when cash flow is thin. For a building that is 40% to 50% occupied, Jeff describes going to much lower leverage, about 20%, to leave breathing room.

By Jeff's account, short-term rates rose about 500 basis points in 14 months. Floating-rate borrowers with interest rate caps saw renewal premiums jump, by his illustrative estimate from about $50,000 to about $500,000. Business plans took longer than projected, and exit cap rates widened, so investors were squeezed from two sides at once.

What protected medical office was going-in yield. Jeff contrasts it with apartment buyers who paid very low cap rates: "But the reason for that is they were baking in a lot of rent growth. They were projecting like 8 to 10% annual rent growth. That just frankly didn't happen."

Three lessons carry forward. Buy at a yield that works with today's debt, not tomorrow's. Match leverage to in-place cash flow. Treat hedging costs as a real expense, not a footnote.

The main risk is refinancing while health care lending contracts. The Mortgage Bankers Association reports that health care property loan originations fell 19% year over year and 50% quarter over quarter in 2Q 2026, while total commercial and multifamily originations rose (MBA, August 2026). Originations by life insurance companies fell 27% year over year. CBRE reports that alternative lenders such as debt funds supplied 38% of loan volume across property types in 2Q 2026, up from 34% (CBRE, 2Q26).

The second risk is the spread itself. At 195 basis points over the 10-year, the MOB cap rate leaves less room for positive leverage than it did in June. A buyer who closes that gap with projected rent growth is making the 2022–23 mistake again.

MARKET SIGNALS

The Fed hiked. The FOMC raised the federal funds target range to 3.75%–4.00% on September 16, and its median participant projects 4.1% at the end of 2026 (Federal Reserve, September 2026).

The 10-year is up. The 10-year Treasury yield was 5.15% on October 19, 2026, up 97 basis points from 4.18% at the end of 2025 (U.S. Treasury; Ridgeline calculation).

Health care lending slowed. Health care property loan originations fell 19% year over year and 50% quarter over quarter in 2Q 2026 (MBA, August 2026).

Lenders size medical office loans on debt coverage ratios and debt yield requirements, not on what a sponsor hopes a building will earn. Ridgeline obtains at least half a dozen loan quotes on each deal. When in-place cash flow is thin, sizing to coverage means borrowing less than the maximum.

The spread between the average medical outpatient building (MOB) cap rate of 7.1% and the 10-year Treasury narrowed from 266 basis points on June 30 to 195 basis points on October 19, 2026 (CBRE, 2Q26; U.S. Treasury; Ridgeline calculation). A narrower spread leaves less room for positive leverage.

Yes, the Federal Open Market Committee (FOMC) raised the federal funds target range by 25 basis points, to 3.75%–4.00%, on September 16, 2026, by a 12-0 vote. Its statement pointed to inflation that remains elevated, and its median participant projects 4.1% at the end of 2026 (Federal Reserve, September 2026).

Health care property lending fell in 2Q 2026. The Mortgage Bankers Association (MBA) reports that health care loan originations fell 19% year over year and 50% quarter over quarter, while total commercial and multifamily originations rose (MBA, August 2026). That makes refinancing the main risk for leveraged medical office owners.

For informational purposes only. Not an offer to sell or a solicitation of an offer to buy any security; any offer is made only through confidential offering documents. Projections are not guarantees of future results.