Floating rate loans compress Willis Tower, Oakbrook Center


About 25% of all outstanding CMBS loans and 60% of all outstanding bank commercial real estate loans are variable rate, according to Trepp.

Rising rates are not necessarily a crisis in the making. Although rates have jumped this year – a key benchmark for floating rate loans, the one-month London Interbank Offered Rate, or LIBOR, rose from 0.10% in early January to 3.59% this month – they are still lower than they were. 15 years ago, before the financial crisis. How far they will rise will depend on the Fed’s rate moves over the next few months.

Most investors who finance large properties with variable rate loans also have some protection against rising rates. Lenders require them to purchase interest rate caps or hedges that cap the amount of interest borrowers pay.

Blackstone, for example, saw the interest rate on the $1.33 billion mortgage on the Willis Tower in 2018 rise to 4.97% from 1.48% at the start of the year. The New York-based private equity firm, one of the world’s largest real estate investors, also bought a rate cap that limits its potential interest cost to 5.38%.

Interest rate caps exist primarily to protect lenders, not borrowers. Generally, lenders require a sufficient ceiling to ensure that borrowers can continue to make mortgage payments and avoid defaults.

Here’s the catch: interest rate caps expire, often when a commercial mortgage loan reaches its original maturity date. Although a homeowner can often extend the maturity date, they must also purchase a new interest rate cap. But the cost of caps has skyrocketed along with interest rates. A cap that cost $50,000 just a year ago could easily cost 20 times more than it does today, further eroding the owner’s profits.

Moreover, caps do little to protect profit margins. Rising rates have already squeezed Willis Tower’s margin significantly: Blackstone’s monthly mortgage payment rose to $4.64 million in October from $1.70 million in January, according to loan data from Bloomberg extracted from federal securities filings.

Based on the October payment, Blackstone’s interest costs are more than $56 million a year, down from a recent low of $19.9 million last year. If rates rise enough to trigger the loan’s interest rate cap, annual debt costs could soar to $71 million.

Still, Willis Tower has held up better than other downtown office buildings, adding tenants in recent months. The 110-story tower generated net cash flow before debt payments of $81.5 million in 2021 and is on track to surpass that figure this year. So unless disaster strikes, rising rates shouldn’t push the building into the red.

Blackstone declines to answer questions about Willis Tower’s debt, issuing a statement instead.

“We expect the tower to continue its strong performance in various economic environments,” the statement said.

Like Blackstone, many homeowners with variable rate loans will suffer financially, but interest rate caps should help most stave off disaster.

“It will be painful,” says mortgage broker David Hendrickson, senior managing director of Walker & Dunlop’s Chicago office. “Owners will be less profitable. That doesn’t mean they won’t be profitable.

This is also true for Oakbrook Center. Although many large regional malls are struggling these days, Oakbrook is not one of them. In 2020, New York-based Brookfield refinanced the 1.2 million square foot property in Oak Brook with $475 million in debt, including a $319 million floating rate CMBS loan.

The loan carries a current interest rate of 6.19%, down from 2.8% in January. The jump pushed Brookfield’s monthly payout to $1.36 million in October from $663,667 in January, according to Bloomberg data.

Yet the mall is generating more than enough cash to cover its debt payment. So while rate hikes hurt, they shouldn’t push property into the danger zone.

“We have no concerns about Oakbrook Center,” a Brookfield spokeswoman said in an email. “The operating fundamentals are the best they have ever been and we look forward to the future of our thriving mall.”

What is murky is the status of the loan’s interest rate cap. A loan document shows that the original ceiling was 5.7%, which would mean that the ceiling already covers the higher interest charges.

But the loan matures next month and Brookfield plans to extend the maturity date by a year, according to Bloomberg. This means Brookfield will have to purchase a new cap, likely at a much higher price than the original. Whether through higher mortgage payments or higher price caps, rising rates pack a punch.


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