Interest-rate Hedges’ Costs Increase–Commercial Real Estate Owners Feel the Squeeze

According to the Wall Street Journal, cost increases for bank-required interest-rate hedges for variable rate commercial real estate (CRE) mortgages are adding pressure for already stressed owners. A 3% interest cap for a $100 million loan, that had cost landlords $98,000 in April 2019, costs $3.48 million today. Many CRE investors bought these caps, which typically run for 3 to 5 years, during the pandemic and are still being protected from increasing interest rates. When current hedges expire, replacing them may be too expensive for many owners, unless timing is their favor and rates drop beforehand.

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