An exponential increase in the cost of interest-rate caps—insurance that CRE borrowers with floating rates purchase to hedge against rate increases—may soon spawn a wave of property sales in an increasingly distressed market.
In 2019, the Mortgage Bankers Association estimated that up to one-third of all commercial property debt was floating rate, with most lenders requiring that borrowers hedge against an increase in the borrowing costs.
When interest rates were low, derivative contracts offering hedges on multimillion-dollar mortgages could be purchased for as low as $10K. Now—as the lion's share of these insurance contracts are expiring—the cost of rate-cap hedges is as much as 10 times higher that it was a year ago, according to a report in the Wall Street Journal.
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