Understanding 10-Year Commercial Loan Rates in 2023

Commercial real estate financing can be complex, with many factors impacting loan rates and terms. For property investors and business owners, it’s critical to understand current market conditions when seeking capital for acquisitions, renovations or refinancing.

One of the most common loan terms for commercial real estate is the 10-year fixed rate mortgage. This article provides an in-depth look at today’s 10-year rates, examining the factors that influence pricing and how investors can secure the best terms.

Current 10-Year Commercial Mortgage Rates

As of February 2023 average 10-year fixed rate loans fall within the following ranges depending on lender type

• Banks: 6.75% – 7.50%
• Agencies: 5.79% – 6.49%
• CMBS: 6.82% – 7.17%

Rates are elevated compared to last year. The Federal Reserve’s moves to curb inflation through interest rate hikes are putting upward pressure on commercial loan pricing. However, rates remain below the peak levels seen during the Great Recession.

What Impacts Pricing?

10-year fixed rate loans are tied to the 10-year Treasury yield As Treasury yields rise in response to Fed policy, lenders adjust commercial pricing accordingly

Beyond the macroeconomic factors, loan pricing differs depending on:

• Property type – Multifamily and industrial assets are viewed as lower risk than hotels or restaurants. Lower risk means better pricing.
• Location – Properties in major metros with strong economic fundamentals garner better rates than unstable markets.
• Loan-to-Value (LTV) – The lower the LTV, the lower the rate since there is less risk for the lender.
• Debt Service Coverage Ratio (DSCR) – Loans with higher DSCRs get better pricing due to lower default risk.
• Prepayment penalties – Loans with prepayment penalties allow lenders to offer lower rates.

Lender Variances

Not all lenders price loans the same, even when underwriting the same property.

• Banks – Tend to offer higher rates but are more flexible on property type, location, LTVs and borrower qualifications. Smaller community banks may have capacity for specialized deals.
• Agencies (Fannie Mae, Freddie Mac) – Offer lower base pricing but have strict underwriting criteria focused on stable assets and experienced sponsors.
• CMBS – Also provide competitive base pricing but require strong DSCRs and major metro locations. Have prepayment penalties.
• Credit unions/private lenders – Have higher minimum loan amounts but can do non-standard deals.

Shopping different lender types is crucial to optimizing cost of capital. An experienced broker helps navigate options.

Securing the Best 10-Year Commercial Loan Rates

While Fed policy pushes rates higher, borrowers can still take steps to secure competitive pricing.

Boosting Debt Service Coverage Ratio

Lenders offer the lowest rates to loans with higher DSCRs (net operating income divided by debt service). For a 10-year loan, target at least 1.25x DSCR. If below, explore raising rents (with market study) to increase NOI.

Lowering Loan-to-Value

Putting more equity into the purchase reduces LTV, enhancing loan pricing. While higher leverage boosts returns, reducing LTV to 60-70% generates material rate savings versus a more aggressive 75%+ LTV.

Reducing Risk Profile

Lenders offer better pricing for less risky loans. Consider recourse loans, where the borrower is personally liable. This reduces risk for the lender. Also, properties with reliable in-place cash flow are viewed favorably.

Using Prepayment Penalties

Loans with 1-5 year prepayment penalties allow lenders to offer lower rates, as they are protected from early payoffs. The tradeoff is less flexibility to refinance.

Obtaining an Interest Rate Lock

Rates often rise during the underwriting process. Locking in early allows time to boost DSCR or lower LTV to improve pricing before closing.

When Are 10-Year Loans Advantageous?

Here are some instances where 10-year financing makes sense:

• Properties with reliable long-term tenants – Locks in low fixed rate over lease term.
• Lower risk assets like multifamily in major metros – Agencies offer very competitive 10-year pricing.
• Borrowers wanting payment stability – 10-year loans eliminate renewal concerns.
• Acquisition financing – Matches fixed-rate term to investment hold period.
• CMBS loans requiring 10-year terms

Shorter 5-7 year loans do offer lower rates today and may provide flexibility. However, the stability of a 10-year fixed term is often worth the small premium.

The Bottom Line

Commercial mortgage rates are elevated but investors still have options to secure competitive 10-year financing. The ideal loan maximizes leverage while meeting the minimum DSCR and pricing parameters.

Working with an experienced advisor provides in-depth market knowledge and access to diverse capital sources. This improves the chances of finding the right loan at the optimum cost of capital for your business plan and investment goals.