The cost of insuring commercial real-estate loans against a rise in interest rates has exploded over the past year, raising the prospect of a market selloff since many property owners will no longer be able to afford these hedges.
Nearly half of all commercial property debt is floating rate, according to a 2019 report by the Mortgage Bankers Association. Lenders usually require that these borrowers hedge against an increase in borrowing costs, through a derivatives contract known as an interest-rate cap that limits a borrower’s exposure to rising interest rates.