SOFR Dominance: Navigating Floating-Rate CRE & Hedging in 2026
By Majid Radaei, RadCRE · · Market Updates
With SOFR holding steady around 4.31%, CRE borrowers face a strategic imperative to optimize floating-rate debt structures and hedging, especially for bridge and construction loans now at SOFR + 300-600 bps.
The continued prevalence of floating-rate financing in commercial real estate, amplified by the transition from LIBOR to SOFR, necessitates a sophisticated understanding of loan structures and hedging strategies. As of May 2026, the Secured Overnight Financing Rate (SOFR) hovers around 4.31%, positioning it as the undisputed benchmark for a significant portion of CRE debt, particularly bridge loans, construction financing, and many agency and CMBS tranches.
Floating Rates Remain Standard for Opportunistic Capital
While long-term fixed-rate options are gaining some traction, floating-rate debt remains the go-to for value-add acquisitions, recapitalizations, and ground-up development. Lenders are increasingly comfortable underwriting to SOFR, with typical pricing for bridge loans ranging from SOFR + 300-600 basis points (bps) and construction loans often at similar spreads, albeit with higher fees and equity requirements. This is evident in recent transactions, such as Brookfield's approximately $800 million construction financing package for a major mixed-use development in downtown Los Angeles, which reportedly utilized a SOFR-based floating rate structure with multiple syndication partners.
Hedging Strategies & Derivative Costs
The imperative for hedging against SOFR volatility has become more pronounced, particularly for borrowers seeking to stabilize cash flows or meet specific debt service coverage ratio (DSCR) requirements. Common hedging instruments include interest rate caps and swaps.
- Interest Rate Caps: These instruments provide borrowers with protection against rising rates above a specified strike price. While cap premiums compressed slightly in late 2025, they remain a significant upfront closing cost, often ranging from 75 to 200 bps of the notional value for a 2-3 year term, depending on the strike and tenor. For instance, a sponsor securing a $50 million bridge loan might incur $375,000 to $1 million in upfront cap costs.
- Interest Rate Swaps: Swaps allow borrowers to convert floating-rate exposure into a fixed-rate obligation for a specified period. These are typically more complex and suitable for longer-term financing or larger institutional borrowers. The fixed rate achieved through a swap is influenced by the SOFR forward curve and market expectations.
Many senior lenders, particularly in the non-bank and debt fund space, mandate hedging for floating-rate exposure, often requiring an interest rate cap with a strike rate no more than 200-300 bps above the current SOFR, or establishing a maximum debt service payment. Trepp data indicates that over 60% of new CMBS floating-rate loans issued in Q1 2026 included some form of interest rate cap requirement.
Lender Comfort and Underwriting Shift
Lenders have largely adapted their underwriting models to SOFR, focusing on sensitivity analyses that stress-test borrowers' ability to service debt in higher rate environments. This involves utilizing a 'stressed' SOFR rate, often several hundred basis points above the current market, to ensure sufficient cash flow and equity cushion. This conservative approach, while potentially limiting leverage, is a direct result of lessons learned from past periods of rapid rate hikes.
RadCRE Perspective
Majid Radaei, Founder of RAD Commercial Realty, emphasizes the strategic importance of hedging, especially for hotel investments and value-add multifamily projects. "For our clients pursuing bridge financing, a robust hedging strategy isn't just a lender requirement; it's a critical component of risk management. We're seeing cap premiums that, while still noticeable, are more palatable than they were 12-18 months ago. However, the choice between a 2-year versus 3-year cap, and the specific strike rate, can materially impact a deal's internal rate of return (IRR) and overall cash-on-cash. We work closely with our clients to analyze not just the upfront cost, but the implied cost of carry under various SOFR scenarios. For a typical hospitality acquisition, where RevPAR growth can be volatile, having a predictable debt service payment through a well-structured cap provides immense peace of mind and strengthens the asset's resilience. For example, on a recent select-service hotel acquisition we advised on, structuring a 3-year SOFR+350 bps bridge loan with an aggressive cap at SOFR + 200 bps, while adding upfront costs, created a de-facto fixed-rate environment for the client, enabling them to confidently execute their property improvement plan without daily rate anxieties. It's about optimizing the capital stack for the specific business plan, not just getting the lowest spread."
Outlook
As the Federal Reserve continues to monitor economic conditions, SOFR is expected to remain the primary benchmark. Sponsors and investors seeking floating-rate debt must prioritize understanding their exposure, evaluating multiple hedging options, and stress-testing their investment theses against various rate scenarios. Partnering with experienced financial advisors who can navigate these complexities will be critical in securing favorable terms and mitigating risk in the current market.
Tags: commercial real estate financing, SOFR rates, interest rate hedging, bridge lending, CRE capital markets, hotel investment financing
Sources: Commercial Observer, Trepp, CoStar, Bloomberg, RadCRE internal analysis