REITs Have Lower Share of Floating Rate Debt Compared to Other Commercial Property Owners
January 19, 2023 | Nicole Funari | Nareit
REITs have low exposure to floating rate debt, with over 87% of the debt held by the industry at fixed rates. In contrast, as cited in the Wall Street Journal, the Mortgage Bankers Association reports that almost half of all commercial property debt is floating rate debt. This leaves many private commercial property owners financially stressed as rates adjust upwards.
Typically, lenders require mortgage holders to hedge against floating rate risk with a derivative contract capping interest rates. With rates on the rise, the cost of these hedging contracts has also escalated, leaving many mortgage holders either unable pay for new contracts or for the cost of the hedge to exceed the planned rental revenue for a year.
