Fixed-rate CRE loans price off Treasuries and lock the rate for the loan term, common for permanent debt of 5 to 10 years. Floating-rate loans price off SOFR plus a spread and reset monthly, common for bridge debt of 1 to 3 years. Each has different cost, hedging, and prepayment implications.
When does fixed make sense?
Stabilized assets with long expected holds, sensitive cash flow, and limited refinance upside benefit from fixed-rate certainty. Life-company permanent loans are typically fixed and priced off the matching Treasury. Agency multifamily is mostly fixed. Fannie Mae also offers variable-rate DUS, including the Structured ARM. Conduit CMBS is typically fixed. Floating-rate single-asset CMBS is priced off SOFR.
When does floating make sense?
Value-add assets, lease-up scenarios, and any deal where the borrower expects to pay off in 1 to 3 years benefit from floating debt. Floating-rate loans typically have flexible prepayment, which is essential for borrowers who plan to sell or refinance early.
What is the rate-cap requirement?
Floating-rate lenders require the borrower to purchase an interest-rate cap that protects against SOFR moving above a strike rate. The cap is purchased upfront, runs for a defined term (often the initial loan term), and must be renewed if the loan extends. The cost varies sharply with rate volatility expectations.
Sources
- Secured Overnight Financing Rate (SOFR) · Federal Reserve Bank of New York · daily
- Treasury Constant Maturity Series (DGS5, DGS10) · Federal Reserve Bank of St. Louis (FRED) · weekly