All About Commercial Mortgage Rates

 

Commercial mortgage rates (and the nebulous factors that affect them) can be a tough nut to crack. Before taking responsibility for large sums of money, borrowers want to understand this complex process and how they can find the best financing terms available to them. 

The problem, it seems, is that there are so many factors and conditions influencing the determination of loan rates and terms that it becomes difficult to gain a comprehensive view of the process, especially given the frequency of rate changes. In this guide, the Finance Lobby team hopes to help clear up common confusions and concerns regarding commercial mortgages and CRE loan rates.

The Capricious Nature of Commercial Mortgage Rates

Commercial mortgage and CRE loan rates are subject to frequent change, making it difficult for both CRE borrowers and investors to stay up-to-date on the latest rates. Because many commercial real estate lenders’ interest rates are set according to indexes determined by HUD (the US Department of Housing and Urban Development) and the Fed, CRE loan rates can change daily – sometimes multiple times per day.

CRE loans typically feature interest rates at a higher premium than other loans due to the increased degree of risk associated with them. Commercial mortgage rates are notably higher than residential mortgage rates (with a few exceptions); banks tend to feel more cautious lending large sums of money for uncertain investments, leading them to set commercial mortgages at a much higher rate than those of residential properties. 

What Determines Commercial Real Estate Loan Rates?

The Fed has one of the largest hands in shaping interest rates for commercial loans. Its quantitative easing program has been dropping commercial bank lending rates since the early 2010s, which in turn has made borrowing and buying properties more accessible for businesses. Some CRE loan rates are determined by “prime rates” set by the Fed while others are linked to variable factors like Treasury Bond yields, the Secured Overnight Financing Rate,  the London Interbank Offered Rate, and more.

Factors Affecting CRE Loan Rates

Oftentimes, loan and interest rates are shaped by a wide range of market factors.

  • Loan Program
  • Supply and Demand
    • Supply and demand is, without a doubt, the main factor in determining CRE loan rates – the number of people investing in certain types of commercial properties, the number of properties available, and the predicted outlook for those properties.
  • Property Type
    • Property type is another fundamental factor affecting the rate of commercial loans. Rates typically vary based on the economic outlook for specific property types, with predicted returns weighing heavily in the determination of loan rates and terms. For example, the interest rate for an apartment building can be quite different than that of a hotel. With apartments in high demand, interest rates are often much lower than other property types; hotels, on the other hand, are less certain to provide a strong return, resulting in higher interest rates.
  • Federal Interest Rates
    • Because the accessibility of CRE loans can directly impact the development of business and employment opportunities in local economies, fluctuations in federal interest rates frequently have a strong effect on commercial mortgage rates.
  • Inflation
    • Commercial real estate is, more often than not, a long-term investment. This means that significant fluctuations in inflation can have an effect on loan rates

Common Questions about Commercial Mortgages and Loans

Here, you’ll find answers to a few of the questions we hear most about commercial mortgages and CRE loans:

What types of properties count as commercial real estate?

  • Almost any type of property can be considered commercial real estate as long as its primary function is for commercial or business use. Whether it be a corner store, a shopping plaza, a hospital, a high-rise office, a storage facility, or any other essential property used by a business, you can find commercial mortgages for almost every kind of property. Commercial mortgages are also available for multi-family properties, such as apartment complexes, student housing units, senior living facilities, and other properties consisting of at least five residential units.

How can commercial loans be used?

  • Companies and entrepreneurs use CRE loans to purchase and finance a wide range of commercial properties for their businesses. Commercial mortgages are somewhat similar to residential mortgages, enabling borrowers to buy a property and pay for it as their business grows. Commercial real estate Investors often look for properties with low interest rates to purchase, which can bring in larger ROIs.

Why are commercial loan rates important for CRE investors?

  • Knowing the latest loan and mortgage rates is very beneficial for CRE investors. They need this information to evaluate potential investments and make informed decisions with their money. Loan rates can have a significant effect on the overall cost of a property, which in turn can influence a business’s margins and returns. Commercial real estate investors need the most up-to-date information about loan and mortgage rates in order to accurately assess the potential risks and rewards of their CRE investments.

What kind of fees and closing costs can I expect with a commercial mortgage?

  • Death, taxes, and closing costs in a commercial mortgage – these are three of life’s great inevitabilities that we must make peace with. Some are regulated by law while some are seemingly tacked on just for fun – closing costs are the dreaded final surprise that all borrowers face.
  • From attorney fees to title insurance, from appraisal fees to credit reports and recording charges, borrowers are responsible for an inordinate amount of costs when it comes time to close on a commercial property. 
  • Closing costs aren’t the only fees that borrowers must pay. Application fees, extension fees, and exit fees for loans are exceedingly common. Origination fees are often added to closing costs, but nevertheless they add to the financial burden of a commercial mortgage.
    • Before you agree to a loan, make sure that you carefully review your loan’s term sheet to understand the schedule and purpose of each fee you are responsible for paying. The fine print is always important.

How much do I need for a down payment on a commercial property?

  • Commercial properties usually require a down payment ranging from 20% of the cost at the minimum to 50% as a loose upper limit; however, the specifics of each loan may differ widely. Asset classification, location, risk profile, and the borrower’s history can all factor into a determination of the required down payment.

Locating the Best Commercial Loan Rates Available

With a multitude of banks and other commercial mortgage lenders to choose from, you have plenty of options when it comes to finding the best mortgage and loan terms based on your specific property, location, and business strategy. If you’d prefer an alternative CRE lender to private lending companies and banks, you can work with government agencies, debt funds, credit unions, insurance companies, and more to find a commercial real estate lender that can meet your needs.

Sometimes, a tried and true old-school approach is your best bet to finding what you need. Calling around and gathering quotes from various commercial mortgage lenders to compare can be one of the most direct ways to assess your options and find the perfect CRE lender for your commercial mortgage or loan.

Pulling Back the Curtain on Commercial Mortgage Rates

The mechanics of commercial mortgage rates may be complicated, unpredictable, and difficult to wrap your head around, but that doesn’t mean that CRE borrowers and investors should just give up. You should always do your due diligence: research, compare your options, and take your time before making a decision. Never let ignorance or convenience guide your judgment; locking yourself into the wrong deal can cause much greater problems later down the line, stalling your growth and limiting your potential.

We hope to have clarified a few of the more puzzling aspects of the commercial mortgage process. The world of CRE mortgages comes with a host of terms and fluctuating commercial mortgage rates that can seem difficult at first, but before long, you will understand it and be a pro. If you still have questions, don’t worry. Finance Lobby, an experienced name in the CRE space, can help you to navigate this multifaceted process. Finance Lobby is committed to educating consumers about every aspect of the commercial real estate trade, 

Finance Lobby is an online CRE lending marketplace that is making it faster and more efficient for commercial real estate brokers and lenders to find their perfect deals. Users are able to set their perfect terms and receive notifications of relevant deals. The Finance Lobby platform also enables CRE brokers and lenders to manage soft quotes, deals, schedules, and communication all in one place. It is the solution to days that are spent chasing dead-end leads.

To learn more about Finance Lobby, including how it can help you to spend time on the things that matter the most, please see https://financelobby.com/

June 20, 2022

sign up for more insights