Home News Floating-rate loans squeeze Willis Tower, Oakbrook Center

Floating-rate loans squeeze Willis Tower, Oakbrook Center

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About 25% of outstanding CMBS loans and 60% of bank commercial real estate loans have floating rates, according to Trepp.

Rising interest rates do not necessarily mean a crisis is imminent.Interest rates have skyrocketed this year, but one of the key benchmarks for variable rate loans, the one-month london interbank rate, LIBOR has risen from 0.10% in early January to 3.59% this month, still lower than it was 15 years ago before the financial crisis. How much higher will depend on how his Fed rates move in the coming months.

Most investors who fund large properties with variable rate loans also have some protection against rising interest rates. Lenders require that borrowers purchase interest rate caps, or hedges, that cap the rate they pay.

For example, Blackstone increased the interest rate on its $1.33 billion mortgage on Willis Tower in 2018 to 4.97% from 1.48% at the beginning of the year. One of the world’s largest real estate investors, a New York private equity firm, also bought a rate cap that capped his potential interest costs at 5.38%.

Interest rate caps exist primarily to protect lenders, not borrowers. Lenders typically require a sufficient ceiling to allow the borrower to continue making mortgage payments and avoid default.

Here’s the problem: Interest rate caps often expire when a commercial mortgage reaches its first maturity date. In many cases, property owners can extend the due date, but they must also purchase a new interest rate cap.But the cost of the cap soared along with interest rates. A cap that just a year ago cost him $50,000 could cost him 20 times more than it does today, further hurting the landlord’s profits.

Additionally, caps do not do much to protect profit margins. According to Bloomberg loan data extracted from federal securities filings, Blackstone’s monthly mortgage payments increased from $1.7 million in January to $4.64 million in October. .

Based on October payments, Blackstone’s interest expense climbed to more than $56 million annually, up from a recent low of $19.9 million last year. If interest rates spike enough to trigger a loan cap, the annual cost of debt could balloon to $71 million.

Still, Willis Tower holds up better than other downtown office buildings. Add Tenant the past few months. The 110-story tower will generate $81.5 million in net cash flow before debt service in 2021 and is on pace to surpass it this year. So unless a disaster strikes, rising interest rates won’t put the building in the red.

Blackstone declined to answer questions about Willis Tower’s debt, instead issuing a statement.

“Tower expects continued strong performance across a variety of economic environments,” the statement said.

Like Blackstone, many landlords with floating-rate loans will struggle financially, but the cap should help prevent catastrophe.

“It will be tough,” said David Hendrickson, a mortgage broker and senior managing director in Walker & Dunlop’s Chicago office. “Owner profits will be reduced.

That goes for Oakbrook Center as well. Many large regional malls are struggling these days, but Oak Brook is not one. 2020 New York-based Brookfield Refinancing a 1.2 million square foot property It has $475 million in debt, including $319 million in variable rate CMBS loans.

The current interest rate on loans is 6.19%, up from 2.8% in January. The surge has seen Brookfield’s monthly payments increase from $663,667 in January to $1.36 million in October, according to Bloomberg data.

Still, the mall is generating enough cash to cover its debt payments. So while higher rates do harm, they shouldn’t push real estate into the danger zone.

A Brookfield spokesperson said in an email, “We are not concerned about Oak Brook Center. Our operational fundamentals are at an all-time high and we look forward to the future of the thriving shopping center.”

What is ambiguous is the situation of interest rate caps on loans. The original cap was 5.7% for him, according to loan documents. This means that the cap already covers the high interest cost.

The loan will mature next month, according to Bloomberg, but Brookfield plans to extend the maturity by a year. That means Brookfield will have to buy a new cap, which can cost a lot more than the original. Either way, higher interest rates hit hard.

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