SOFR's Evolving Role in CRE Floating-Rate Debt & Hedging Strategies

By Majid Radaei, RadCRE · · Market Updates

Amidst persistent rate volatility, SOFR-based floating-rate loans dominate new CRE originations. We examine current market structures, hedging costs, and lender preferences. SOFR (1M) currently stands at ~4.31%.

The Prevailing Landscape of SOFR-Based Debt in Commercial Real Estate

The commercial real estate (CRE) financing market continues its deep integration with the Secured Overnight Financing Rate (SOFR) as the benchmark for floating-rate debt. Following the cessation of LIBOR, SOFR has become the undisputed standard, driving significant shifts in loan structuring and hedging strategies. Lenders largely prefer SOFR for new originations, reflecting its regulatory backing and observed market liquidity.

According to recent reports from the Mortgage Bankers Association (MBA), floating-rate loans, predominantly SOFR-indexed, constituted a substantial portion of CRE debt in Q4 2025 and Q1 2026, particularly for transitional assets and bridge financing. While overall lending volume remains constrained by higher interest rates and tighter credit conditions, the structures supporting these floating-rate deals are continuously evolving.

Current Market Dynamics for Floating-Rate Loans and Hedging Costs

Current SOFR benchmarks indicate a 1-month SOFR hovering around ~4.31% as of late March 2026. For borrowers accessing floating-rate debt, typical spreads for bridge loans range from SOFR + 300 bps to SOFR + 600 bps, depending on asset class, leverage, and sponsor strength. For instance, a premier multifamily bridge loan might price at SOFR + 350 bps, while a value-add hotel acquisition could see SOFR + 500 bps or higher.

Hedging costs, primarily through interest rate caps, remain a critical component of deal economics. The cost of a 2-year SOFR interest rate cap with a strike price of 6.0% (meaning the lender requires the borrower to cap their interest rate exposure at 6.0%) can vary significantly based on market volatility and the tenor of the cap. While cap premiums have moderated from their 2023 highs, they still represent a material upfront expense. For a typical $50 million floating-rate loan, a 2-year cap could range from $250,000 to $500,000+, influencing the return profile of many opportunistic investments.

Major lenders like Wells Fargo, JPMorgan Chase, and Goldman Sachs continue to offer sophisticated SOFR-based products, often requiring borrowers to purchase rate caps or collars to mitigate interest rate risk, especially at higher leverage points. This prudency reflects ongoing concerns about interest rate trajectory and potential market dislocations.

RadCRE Perspective

"The transition to SOFR is complete, but the market's response to it is anything but settled. Many borrowers, particularly those who financed pre-2022, are now facing maturity walls with significantly higher SOFR rates and elevated cap costs. We're seeing situations where a borrower who previously hedged at a 2.5% LIBOR cap for 50 bps, is now looking at a 6.0% SOFR cap costing 100-150 bps, effectively eating into their cash flow and equity returns," states Majid Radaei, Founder of RAD Commercial Realty.

"At RadCRE, we stress comprehensive scenario analysis, not just for the loan spread, but for the all-in cost including hedging. For our hotel investment sales clients, for example, a lender might require a 7.00% debt yield threshold at a 6.5% all-in rate. If SOFR swings up, that cap can quickly become critical. We're advising clients to explore shorter-term caps in a flattening yield curve environment, or even creative structures like periodic caps or collars where feasible. On the capital markets side, we're seeing some non-bank lenders offer structured products that build the cap premium into the loan spread, simplifying the upfront cost for borrowers, albeit at a higher effective rate. Understanding these nuances is paramount. The 'set it and forget it' approach to floating-rate debt is a relic of the past."

Creative Solutions and Future Outlook

Looking ahead, the market anticipates continued reliance on SOFR for floating-rate debt. The rising adoption of Term SOFR, which provides a forward-looking rate based on SOFR futures, offers more predictability than daily SOFR, gaining traction among certain lenders for less volatile asset classes. However, daily SOFR remains prevalent for highly transitional or construction financing.

Furthermore, the distressed asset landscape is creating opportunities for sophisticated investors. Borrowers struggling with expiring caps or unhedged floating-rate debt are increasingly seeking advisory services for loan modifications or recapitalizations. RadCRE is actively assisting clients in navigating these complex scenarios, leveraging our deep relationships with both traditional and alternative capital providers to structure optimal solutions for acquisition and refinancing.

Tags: commercial real estate financing, SOFR, interest rate caps, bridge lending, CRE capital markets, hotel investment sales

Sources: Mortgage Bankers Association (MBA) reports, CoStar News, Commercial Observer, GlobeSt, Internal RadCRE market analysis