CRE Borrowers Must Understand the Risk With BSBY, SOFR Indices

<p>What kind of incremental risk does an index pose to a commercial real estate investor who’s set to borrow?</p> <p>That’s the question Thirty Capital CEO Rob Finlay posed to his team of market analysts at this morning’s CRE Capital Markets Report roundtable podcast.</p> <p>Analyst Jay Saunders said: “If you have an option your lender is going to tell you what the index should be, or what the lender wants to use.</p> <p>“To the extent that you have options, you really need to look at your plan of finance,” Jay continues. “If you are a hedging entity, SOFR is going to be a better index for you; BSBY is not.”</p> <p>Jay pointed out that there isn’t an options market in BSBY. “So if you're a floating rate borrower and you intend to buy a cap, you can't buy a BSBY cap . . . keep that in mind, at least for the moment.”</p> <p>Jay explained that pure cash borrowers not concerned about hedging need to understand the index they are offered. If you are an entity that chooses to hedge some amount of that exposure, then you really need to think about what the banks are offering you, because some of those indices may be either unhedged, or are much more expensive to hedge than others.</p> <h1>CRE Borrowers Locking In For Six Months</h1> <p>Analyst Jeff Lee says that right now a lot of CRE investors are kicking the can down to Q1 of 2022 and locking in rates. This can potentially change an investor’s finance plan and because a jump in an index could make some deals go sideways.</p> <p>Jeff says Thirty Capital is talking to a lot of clients about the operational band of where things make sense now versus where they might start not to make sense, even if they go out to six months to a year.</p> <p>“I think the big thing is that the national average for multi-cap rates was down almost 50 basis points,” he noted. “So you've got this pocket right now of super-low cap rates.”</p> <p>Jeff says commercial real estate borrowers need to try to know what their threshold is in terms of basis points and the Ten-year, vs cap rates coming