The switch to SOFR is likely to have a positive impact on the commercial and multifamily lending industry in the long term, but in the short term, there could be a few hiccups. In April 2018, the Federal Reserve Bank of New York admitted that it had included incorrect data in its calculation of SOFR, which could lead to market uncertainty. In addition, many real estate loans that are tied to LIBOR have terms that go past 2021, and it’s uncertain what will happen to these loans after LIBOR is no longer reported.
In the best case scenario, a clean swap could occur without much disruption, but it’s possible that the fallout of the switch could include legal action such as class-action lawsuits, or even the creation of an adjustment spread that would even out the differences between the two indexes. Alternatively, an entirely new index could be used, such as SONIA (the Sterling Overnight Interbank Average Rate), or Ester (the European Central Bank’s euro short-term rate).
The switch to SOFR will mainly impact variable rate loans, including many bank apartment loans and a wide swath of Freddie Mac and Fannie Mae multifamily loans. In contrast, since most CMBS loans, all HUD/FHA multifamily loans, and many life company loans are fixed rate, the transition to SOFR should not affect them as much.