CMBS Loan Rates: The Basics
Interest rates for CMBS loans vary by the day, but usually stay within a tight range for most borrowers, with exceptions for particularly desirable or particularly risky properties. CMBS loan rates are generally based on the swap rate, plus a margin, also known as a spread, which compensates a lender for their risk and provides for their profits. Of course, CMBS loans are later securitized and sold to investors, so the spread also provides for the investors’ profits.
Factors That Influence CMBS Spreads
A variety of factors influence CMBS spreads; those that increase risk cause spreads (and interest rates) to rise, while those that reduce risk reduce credit spreads. Some of the most influential factors include:
Property Type/Condition: Hospitality properties are generally some of the riskiest property types eligible for multifamily loans, while the safest property types include traditional multifamily and commercial properties. In addition, higher quality properties (think Class A) are less risky, while poorer quality properties (think Class C) are riskier and command higher spreads.
Cash Flow/DSCR: The greater a property’s cash flow relative to its debt obligations, the safer a loan will be, and the lower its spread (and vice versa). The minimum DSCR for most CMBS-eligible property types is 1.20-1.25x DSCR, but riskier property types may need 1.40-1.50x DSCR to qualify.
Loan Term/Size: Larger loans typically have lower credit spreads, while longer term loans have higher spreads. For instance, a large, short-term loan would have the smallest spread, while a smaller, long-term loan would have the highest spread.
Leverage/LTV: The average maximum LTV for a CMBS loan is 75%, but this can vary based on other risk factors. Highly desirable properties may be permitted LTVs up to 80%, while riskier properties may only be allowed 70%. Higher LTVs typically lead to higher spreads, as they increase risk for lenders.
Lease/Tenant Strength: If the tenant in a commercial property is a large corporation with a long-term lease (for instance, if a credit tenant lease is involved), CMBS spreads are usually lower, while smaller or lesser known tenants may face higher spreads.
How do CMBS Rates Compare to Other Commercial Loans?
Right now, CMBS loans are quite competitive, especially since they often have relaxed borrower requirements and are generally more asset-based (at least when compared to HUD, Fannie Mae, and SBA 504 loans). For borrowers who qualify, HUD/FHA multifamily loans, life insurance company loans, Freddie Mac Multifamily and Fannie Mae multifamily loans can often be less expensive than CMBS, provided a borrower can qualify. For owner-occupied commercial real estate, SBA 504 loans can also sometimes be less expensive than CMBS. Traditional bank loans, in some cases, can be less expensive, but, more often than not, end up being pricier than conduit financing.
As one might expect, soft money loans, hard money loans, bridge loans, and commercial construction loans are, in general, significantly more expensive than CMBS, as they deal with riskier situations, which naturally must be factored into the interest rate.