Floating Rate Refis and the Impact of Rising Interest Rates on Your Commercial Property

Everyone in the industry is aware of how difficult the CRE refi market is at this point. However, the connection between high interest rates and many lenders, particularly banks, tightening their requirements and even withdrawing from the markets is still unclear.

To better understand at least one mechanism in place based on the Secured Overnight Financing Rate (SOFR), CRED iQ conducted some data analysis. This is “a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities,” according to the Federal Reserve Bank of New York, rather than looking at a rate range the Federal Reserve sets for the federal funds rate. Instead of self-reported data that banks could manipulate for profit like the old LIBOR measure did, the data is based on transaction costs that have actually been gathered.

It makes sense that the firm highlighted that adjustable rate CRE loans provide a hurdle when interest rates are rising. The increasing rate tidal indicates that there is a significant likelihood that whatever floating rate a plan has foreseen won’t be enough unless an investor, developer, owner, or operator has prepared ahead.

According to CRED iQ’s research on floating loans, 44% of loans with near-term expirations will have rate cap agreements that expire before the loans mature. According to the Federal Reserve Bank of New York’s SOFR data, it is obvious that the increase in SOFR is having a significant impact on upcoming floating rate loan maturities.

a warning that correlations don’t always imply causality. Even though two sets of data are trending in the same direction, they may not fully or even mostly be responsible for one another’s moves. Many apparent correlations between lending and SOFR were discovered by CRED iQ. When researching Fannie Mae floating rate issuance, they discovered “effects of the rising interest rate environment, including the aggregate Average Original Note Rate, Average Loan Scheduled Interest Due, and how these metrics vary by Seller.”

According to CRED iQ, “it is clear from the analysis of the trailing twelve-month (TTM) data that the average interest due on Fannie Mae loans has increased by over 280%.” If rates rise on a floating rate loan, then more money flows into rent-taking with less available to enhance DSCR and lower property values increasing LTV. “This surge is exerting substantial pressure on Debt Service Coverage Ratio (DSCR) and Loan-to-Value (LTV) ratios for these properties.”

Remember that there are other factors as well, such as rising Treasury yields. They act as markers for secure returns that can be used to calculate risk-adjusted management. Over 5.5% yields are on the short end of the Treasury curve. On Monday, September 25, a 1-year is 5.46%, and a 10-year is 4.44. To exit a safe investment, investors require a large return. The biggest asset management, BlackRock, believes that rates will remain high and may even continue to rise from their 16-year highs.