Nearly a third of all commercial debt is now tied to floating interest rates. To hedge the risk of raising interest rates, borrowers often purchase interest-rate caps. When interest rates are low, these interest-rate hedges are relatively cheap. However, as interest rates have continued to rise, the costs of interest-rate protections have skyrocketed. This puts borrowers with expiring interest-rate caps in the undesirable position of paying a significant price for a new interest-rate cap, attempting to re-finance during a less-than-desirable rate environment, or selling their properties. It is too early to tell but initial signs indicate that rising interest-rate cap costs could contribute to a surge in commercial real estate sales over the next year.
