CMBS Loan Interest Rates: What You Need to Know

Conduit loan rates are typically based on the swap rate plus a margin, or spread, designed to compensate the lender/investors for their risk. The swap rate varies based on market factors, while the spread is determined by both market factors and the risk of the individual loan.

CMBS Alternatives: Agency Loans

For those looking for financing options for multifamily properties, Fannie Mae and Freddie Mac multifamily loans, also known as agency loans, are some of the most popular and competitive options on the market. These agency loans usually offer lower interest rates than CMBS, and have a significantly smaller minimum loan amount of $1 million compared to the $2 million minimum set by the vast majority of CMBS lenders. While borrowers typically need great credit scores, experience owning or managing similar projects, and very strong financials to qualify for an agency loan, CMBS loans are available to those who may not have the greatest credit or the strongest financials. In addition, CMBS loans are available to a much wider swath of property types, including hotels, office buildings, self-storage facilities, and industrial properties.

Fannie Mae

Freddie Mac

How CMBS Loan Spreads are Determined

CMBS loan spreads, also known as credit spreads, are usually determined by factors including:

• Leverage/Loan-to-value (LTV): CMBS lenders typically allow LTVs of up to 75% (and some even permit 80%), however, properties with lower LTVs can often benefit from a smaller spread, and therefore, a lower interest rate.

• Property location: Since loan spreads are tied to risk, properties in more desirable, higher traffic locations are less likely to default, and can therefore command reduced interest rates.

• Tenant strength: For retail and office properties, tenant strength is key. For example, a power center anchored by a Walmart with a 20-year credit tenant lease can usually get a much lower interest rate than a similar shopping center occupied by a lesser-known regional grocery store.

• Loan term: Longer-term loans are typically riskier for investors, so, in most cases, as the term of a CMBS loan goes up, so does the interest rate.

• Loan size: With traditional commercial mortgages, larger loans equate to lower interest rates, and, while the same typically goes for CMBS loans, lender policies can vary.

• Lease terms: In general, CMBS lenders prefer that office or retail properties with multiple tenants have staggered leases to reduce risk. In the case of shopping centers or malls with a large anchor client, (including credit tenant lease scenarios) lenders often require that the term of the lease is longer than the term of the CMBS loan.

• Asset class/asset type: Certain asset classes, like hotels, are generally far riskier than office or apartment buildings in top-tier markets, and, just like for other factors, higher risk equals a higher interest rate.

• Property cash flow (DSCR): Most CMBS lenders require a minimum of 1.25x DSCR for most property types, with a minimum of 1.40x or 1.50x for riskier assets, such as hotels. As one might expect, the higher the DSCR, the less risky the loan, and the lower the potential interest rate that the borrower is likely to be offered.

• Asset quality/condition: Just like properties in great location, recently built, high-quality properties (usually Class A assets) can command significantly lower interest rates than lower-quality properties.

• Economic conditions: In times of greater economic risk, CMBS lenders will want to hedge their bets by increasing the interest rate, while in times of stability, lenders will be more likely to reduce interest rates to attract more borrowers and increase overall loan volume.