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Fixed Or Floating: Which Is Best For CRE Borrowers?


The past year has been a tumultuous one for the commercial real estate industry, but after months of waiting on the sidelines, developers are ready to dive back in and kick-start their delayed projects.

Despite their excitement, many of these developers might still be concerned about finding the capital to get started. According to banking experts, however, there are plenty of options for them to choose from. 

“The bottom line is that it's really good to be a borrower right now,” said Michael Keach, a senior vice president with financial services provider KeyBank Real Estate Capital. “There is a lot of liquidity in the system and borrowers have more options than ever as they look to execute on their business plan. There are options across the spectrum: fixed and floating, short- and long-term with a number of lenders able to provide a menu of options. Ultimately it comes down to the client's business plan.”

Keach and KeyBank originations expert John P. Hofmann shared observations with Bisnow on what CRE borrowers should consider before signing on the dotted line. To begin, they urged people to keep up to date on which loan products are available to them and how they might fit their goals, because what might have worked for them two years ago might not be the best option for them today.

Stay Current

“Our advice to clients is that it's important to stay current on the debt markets because we obviously just came through a massive disruption,” Hofmann said. “The markets bounced back much quicker than a lot of people expected, and borrowers need to make sure they are uncovering all of the opportunities out there. The disruption in the capital markets shifted lenders to focus on certain asset classes. In an effort to deploy capital to those property types, lenders have gotten more creative and are working outside of their traditional product structures.”

Loan rates are at historic lows, starting at just above 2% and going up to the low 3% range. These attractive rates in the face of inflation are tempting to CRE firms shopping for loans. However, Keach noted that borrowers give up some flexibility around their business plans and prepayment options when they fix the rate.

Does that then mean a floating rate is preferred right now? Hofmann said floating rates’ flexibility appeals to many borrowers today, but it all depends on each clients’ plans and goals.  

“Our job is to present all options to our clients, and we're agnostic as to which direction they choose,” Hofmann said. “But we're seeing a lot of value-add opportunities where people need the flexibility to buy, fix and then sell the asset, which lends itself to the floating rate. And the floating rate index has stayed relatively low over the past 10 to 20 years.”

An Overwhelming Environment

This may be a good time to be a borrower, but that doesn’t mean it is easy to choose among lenders and their offerings. Today, borrowers have their pick among banks, insurance companies, nontraditional lenders, commercial mortgage-backed securities and more. 

Which is best for them? Keach recommended maintaining “a good stable of lenders that can grow and operate with them as they asset-manage their portfolio.” Even with this, however, he recognized how difficult it can be to find the right source of capital. 

"It can be overwhelming in this environment for a client to think about the options across all these different buckets of capital,” he said. “We advise folks that they need to canvass different parts of the capital markets. At the same time, focus on finding the right relationship and the right type of debt for the asset.”

Hofmann noted that some borrowers might prefer the convenience of working with a one-stop-shop that can answer all of their questions. He said he likes to present all available options, whether floating or fixed rate, so that the client can consider the pros and cons of each.

Capital Ideas

Whichever options they select, CRE investors should be encouraged by the large amount of debt capital potentially available to them, Hofmann said, adding that it is “more than we’ve seen in our lifetime.” And, he noted, the industry is optimistic despite recent challenges.

“For the most part, I think people feel like we've weathered Covid,” he said. “We've gotten to the other side and feel like the growth is back in the American economic machine.”

This article was produced in collaboration between Studio B and KeyBank. Bisnow news staff was not involved in the production of this content.

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