Commercial Real Estate Market Research
Up-to-date analysis of market trends, rates, and property types to inform your financing decisions
Understanding the current market conditions is crucial when seeking commercial real estate financing. This page provides an overview of key trends, data, and factors influencing commercial mortgage rates and lending today, drawing upon insights from various industry sources.
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1. Overview of the Commercial Real Estate Market
Commercial real estate (CRE) loans are used in the United States to finance income-producing properties. These loans are significant financing tools for economic development, helping companies acquire business property, improve services, and implement expansion. While commercial loans take a smaller fraction of the real estate market compared to residential mortgages, which receive further government backing, commercial properties remain essential income-producing assets.
2. Market Performance & Trends
The CRE lending market ebbs and flows with interest rates, inflation, and overall economic health.
Interest Rate Environment
Commercial loan rates are often slightly higher than residential mortgages, typically around 0.25 percent to 0.75 percent higher. Rates for purchasing commercial property are higher because commercial real estate loans are considered illiquid assets with no organized secondary market like residential mortgages. Depending on the establishment and financing type, rates typically range between 1.176 percent and 12 percent, though outliers exist. Rates vary significantly based on the lender type, for example:
| Lender Type | Rate Range |
|---|---|
| Freddie Mac Optigo | 6.39% – 8.01% |
| Fannie Mae | 6.49% – 7.81% |
| HUD 223(f) | 6.25% – 7.30% |
| CMBS | 6.46% – 7.95% |
| Regional Banks/Credit Unions | 6.95% – 10.50% |
| Life Insurance Companies | 6.21% – 7.11% |
| Debt Funds | 9.07% – 15.32% |
| HUD 221(d)(4) | 6.85% – 7.90% |
| SBA 504 loans | 2.231%-3.546% APR (as of July 21, 2020) |
| SBA 7(a) loans | 5.50%-11.25% (as of July 21, 2020) |
| Hard Money Loans | Typically 10% or more, with some data showing ranges of 8%-15%+ |
| Bridge Loans | Typically in the 6% to 10% range |
Factors Influencing Rates
Commercial mortgage rates are determined by many different factors, including property type, location, loan-to-value ratio (LTV), debt service coverage ratio (DSCR), debt yield, borrower's net worth, liquidity, credit rating, and level of experience. Loans with the lowest risk profile tend to get the best rates.
Interest Rate Indexes
Lenders tie commercial loans to indexes. Popular ones include the prime rate, LIBOR (London Inter-Bank Offered Rate), U.S. Treasury Bonds, and swap spreads. The 10-year Treasury note, in particular, is a benchmark for commercial and residential mortgage rates. Recent economic events, such as Federal Reserve rate cuts impacting short-term rates like the Prime Rate, have not necessarily led to a decrease in long-term Treasury rates, which are crucial for most commercial mortgages.
Recent Rate Changes
Data from mid-2020 to early August 2022 shows a significant percentage change in midpoint rates across various lenders, indicating how changing credit conditions impact options.
3. Property Type Analysis
The performance and lending outlook vary significantly depending on the type of commercial property:
Office Buildings
The COVID-19 pandemic created a divide between primary (nicest buildings in attractive locations) and secondary (older buildings) office properties. Demand supports rent growth in top-tier towers, but interest in older buildings continues to fall. Many lenders are hesitant about older office buildings, requiring investors to put in more equity.
Industrial Properties
Expected to have another strong year with demand keeping up with supply, leading to solid rent growth and low vacancies. Factors driving growth include e-commerce increase and supply chain transformation. Lenders remain bullish on this sector. Types include logistics hubs, cold storage, and light manufacturing.
Retail Properties
A lack of new supply is helping the sector rebound from pandemic declines. Rebounding retail sales contribute to stability, despite inflation and rising interest rates. Labor shortages may lead to more technology solutions. Types include strip malls, regional shopping centers, and single-tenant retail.
Hotel/Motel Properties
Investment activity was subdued but may see improvements with easing travel restrictions and increased business travel, particularly in certain locations. Hotels are sensitive to economic cycles and have a higher risk profile, often financed with bridge or CMBS loans.
Multifamily Housing
Includes apartment complexes and condominium conversions. This sector often benefits from high demand and stable cash flow. Fannie Mae and Freddie Mac (Agency) programs are specifically available for multifamily and affordable housing. SRO (Single Room Occupancy) properties are a subset of multifamily, often viewed through the lens of affordable or supportive housing, with specific financing options including Agency loans, HUD programs, and LIHTC.
Self-Storage Facilities
Considered recession-resilient with high occupancy and low operating costs. Includes climate-controlled and various storage units.
Medical Office Buildings (MOBs)
Feature long-term leases with healthcare providers and a less volatile tenant base. Includes outpatient clinics and diagnostic centers.
Mixed-Use Developments
Combine residential, retail, office, or entertainment spaces. Underwriting can be complex and may require construction or mezzanine financing.
Special Purpose / Niche Properties
Data centers, mobile home parks, senior living facilities, student housing, and other specialized properties require specialized lending expertise.
4. Lending Landscape
Commercial loans are commonly offered by banks and credit unions, as well as insurance companies and independent investors. Government-backed options include Small Business Administration (SBA) loans. Private investors often lend at higher rates.
Different loan types are offered by specific sources:
- Conventional commercial mortgages: Banks and credit unions.
- Conduit or CMBS loans: Pooled and sold to investors, packaged by conduit lenders, commercial banks, and investment banks.
- SBA loans (7(a) and 504): Offered through partner lenders, micro-lending institutions, and community development organizations.
- Hard Money Loans: Private investors.
- Bridge Loans: Similar to hard money, offered by private lenders.
- Fannie Mae & Freddie Mac Loans: Government-sponsored enterprises (GSEs) via approved lenders.
- Construction Loans: Offered by various lenders specializing in new development or major renovations.
- Mezzanine Loans: Provided by firms offering junior capital behind senior debt.
- Preferred Equity Investments: Offered by private equity funds or REITs.
5. Key Metrics for Evaluation
Lenders thoroughly review a borrower's financial status, business finances, and property characteristics. Key ratios and factors include:
Business Credit Score
Assessed by agencies like FICO SBSS (score 0-300, 160+ preferred for SBA), Dun & Bradstreet PAYDEX (score 1-100, 80+ preferred), and Experian Business Credit Score (score 0-100, 80+ preferred).
Personal Credit Score
Most lenders prefer a FICO score of at least 680, with 700+ increasing approval chances.
Loan-to-Value (LTV) Ratio
The percentage of the loan amount compared to the property's market value. Lenders typically accept 60% to 80% LTV, with higher LTV indicating higher risk and potentially higher rates. The acceptable LTV varies by property type (e.g., 65% for land development, up to 80% for construction/multi-dwelling units). Some non-conforming loans may offer up to 90% financing. Owner/users may qualify for up to 90% LTV financing. For apartment purchases, lenders typically lend up to 75-80% LTV, and for other commercial properties, up to 70-75% LTV.
Debt Service Coverage Ratio (DSCR)
Estimates a company's available cash flow to cover debt obligations (Annual NOI / Annual Total Debt Service). A good range is 1.15-1.35, with 1.25 typically required by lenders. A value above one indicates the debt is manageable for the income generated.
Debt Yield
Shows the income generated by a property compared to the loan amount (NOI / Loan Amount).
Company Age
Lenders prefer businesses running for at least 2 years, though older businesses may have higher approval chances.
Occupancy Requirement
For owner-occupied businesses applying for a commercial mortgage, occupying 51 percent or more than half of the property is typically required. Failure to meet this may necessitate an investment property loan instead.
6. Market Commentary & Resources
Stay informed about current market dynamics. Resources include articles discussing the impact of inflation, interest rates, and job reports on CRE.
- Industry publications: National Association of Realtors (NAR) Commercial Market Reports
- Economic analysis: Federal Reserve Economic Data (FRED)
- Market research firms: CBRE, JLL, Cushman & Wakefield research reports
- Industry associations: Mortgage Bankers Association (MBA) Commercial/Multifamily surveys
7. Use our Commercial Mortgage Calculator
Utilize our free commercial mortgage calculator to estimate potential payments based on current market interest rates and loan terms. The calculator can provide estimated Principal & Interest (P&I) payments, Interest-Only payments, and Balloon payments. Remember to consider additional expenses like insurance premiums and taxes when budgeting.
Go to Calculator8. Key Terms to Know
Familiarize yourself with common commercial real estate financing terms, including but not limited to:
- Amortization Period: The length of time over which loan payments are calculated, often longer than the loan term.
- Balloon Payment: A large one-time payment due at the end of a loan's term.
- Basis Point (BP): One-hundredth of one percentage point (0.01%).
- Cap Rate: A property's net operating income divided by its current market value or purchase price.
- Collateral: Assets pledged as security for a loan.
- Debt Service: The cash required to cover the repayment of interest and principal on a debt for a particular period.
- Debt Service Coverage Ratio (DSCR): Net operating income divided by total debt service.
- Debt Yield: Net operating income divided by the loan amount.
- Loan to Value Ratio (LTV): The loan amount divided by the property's appraised value.
- Maturity Date: The date when the final balloon payment on a loan is due.
- Prime Rate: The interest rate that commercial banks charge their most creditworthy customers.
- Prepayment Penalty: Fees charged for paying off a loan before its maturity date, including yield maintenance, defeasance, and step-down penalties.
- Principal and Interest (P&I): A loan payment that includes both principal repayment and interest charges.
- Refinance: Replacing an existing loan with a new one, typically to secure better terms.
- Non-Recourse: A loan where the lender cannot pursue the borrower's personal assets beyond the collateral if the borrower defaults.
Get a Personalized Rate Quote
Market conditions constantly change. For the most accurate rate and terms based on your specific property type, location, and financial profile, connect with our commercial mortgage experts.
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