Fixed vs. Variable Commercial Mortgage Loans

One of the most consequential decisions a commercial real estate borrower makes is whether to take a fixed-rate or variable-rate mortgage. Get it right and your financing enhances returns. Get it wrong and you spend the next five to ten years watching your debt service consume cash flow you planned to distribute or reinvest. The choice is not purely mathematical — it involves assumptions about interest rates, your hold strategy, and your tolerance for uncertainty.

How Fixed-Rate Commercial Mortgages Work

A fixed-rate commercial mortgage locks your interest rate for the entire loan term — commonly 5, 7, or 10 years for bank and life company loans, and up to 10 years for CMBS. Your monthly debt service payment is the same from month one to the final payment. Regardless of what the Federal Reserve does, what happens to Treasury yields, or how credit spreads move, your rate does not change.

The most common fixed-rate options in commercial real estate are:

• CMBS (conduit) loans: 10-year fixed terms, non-recourse, typically the most competitive fixed rates available for income-producing properties
• Life company loans: Conservative underwriting, low LTVs, excellent fixed rates for high-quality assets
• SBA 504 debentures: 20- or 25-year fixed rates, below-market pricing due to the government guarantee, limited to owner-occupied or job-creating projects
• Agency loans (Fannie/Freddie): Fixed or hybrid rates for multifamily assets, with very competitive terms

How Variable-Rate Commercial Mortgages Work

Variable-rate commercial mortgages — also called adjustable-rate or floating-rate loans — price off a benchmark index (historically LIBOR, now SOFR) plus a spread. The rate resets periodically, often monthly or quarterly, and moves up or down with the benchmark. Some loans offer an initial fixed period — a 5/1 ARM fixes the rate for 5 years, then adjusts annually — providing a middle ground between full fixed and full floating exposure.

Common variable-rate structures in commercial real estate include:

• Bridge loans: Short-term (1–3 years), floating rate, used for value-add or transitional properties that are not yet stabilized
• Construction loans: Interest-only floating rate during the construction period, converting to permanent financing at completion
• SBA 7(a) loans: Floating at prime plus a spread; rate changes with every Fed move
• Bank portfolio loans: Often priced as 5- or 7-year fixed with a balloon, then repriced at market rates at maturity

The Case for Fixed Rates Today

In the current environment — with rates elevated and the future direction genuinely uncertain — fixed-rate financing carries a compelling argument for most stabilized commercial real estate assets. Here is the core logic:

Certainty of cash flow. Commercial real estate is a cash flow business. Investors and lenders underwrite to net operating income minus debt service. When debt service is fixed and predictable, you can accurately model returns, plan distributions, and manage operations without a variable that you cannot control. A 200 basis point move in your floating rate — entirely plausible over a 5-year period — can turn a healthy DSCR into a problem loan.

Rate risk is asymmetric. Rates can only go so much lower from here, but there is no ceiling on how high they could go in a prolonged inflationary cycle. Locking a fixed rate caps your downside. If rates fall, your exit options — sale, defeasance, or refinance — remain available, albeit at some cost.

The spread between fixed and floating is narrow. Historically, floating rates carry a premium discount to fixed rates to compensate borrowers for taking rate risk. In an inverted yield curve environment — where short-term rates are higher than long-term rates — that discount has largely disappeared or even reversed. Borrowers are paying near-fixed-rate pricing for the privilege of floating rate risk. That is a poor trade.

When Variable Rates Make Sense

Variable rates are not always the wrong answer. There are specific situations where floating-rate debt is the appropriate — or only — tool available:

Short hold periods. If you are acquiring a value-add property with a clear 2–3 year business plan — renovate, stabilize, sell — a bridge loan's floating rate may be cheaper in total interest cost than a fixed-rate loan with a prepayment penalty you would have to break on exit.

Transitional assets. Properties in lease-up, renovation, or repositioning generally cannot qualify for fixed-rate permanent financing until they achieve stabilized operations. A floating-rate bridge loan is often the only option until the asset is ready for permanent debt.

Rate cap protection. Many sophisticated floating-rate borrowers purchase interest rate caps — derivative instruments that limit how high the floating rate can go. If you have a floating rate loan at SOFR + 250 bps and purchase a cap at 8% strike, your all-in rate cannot exceed 8% regardless of where SOFR goes. Caps cost money (more in a volatile rate environment), but they can make floating rate debt manageable for income-producing properties.

Making the Decision for Your Situation

The right structure depends on four factors: your expected hold period, your property's current stabilization, your cash flow sensitivity to rate changes, and your view on interest rates. A long-term hold of a stabilized asset almost always argues for fixed-rate debt. A short-term value-add play argues for floating-rate bridge financing. Everything in between requires a careful analysis of the trade-offs.

First Realty Capital structures both fixed-rate CMBS loans and floating-rate bridge products for commercial real estate owners across all asset classes. Contact our team to model the fixed vs. variable comparison for your specific property and business plan.

Frequently Asked Questions

Related reading: Higher for Longer: CRE Rate Strategy  |  Understanding the CMBS Capital Stack