With interest rates still being held down by the ongoing effects of the COVID-19 pandemic, this is a good time for small business owners to take advantage of low commercial real estate (CRE) loan rates. The type of commercial real estate loan you choose will be one of the determining factors in your interest rate.
The chart below lists five of the most common CRE loan types and the average rates.
Commercial Real Estate Loan Rates Summary
Type of Loan | Average Rates |
|---|---|
SBA 7(a) Loan | 5.5% to 8% |
SBA 504 Loan | 2.372% to 2.912% on commercial development company (CDC) portion—4% to 10% on lender portion |
Conventional Bank Loan | 5% to 7% |
Hard Money Loan | Starting at 4.75% |
Online Marketplace Loan | 8% to 12% |
If you’re looking for a commercial real estate lender, South End Capital is an excellent choice. South End Capital has mortgages for commercial and investment residential properties, rural locations, special-purpose properties, and even land loans. Check out South End Capital’s website for more information.
SBA 7(a) Loan
- Average rates: 5.5% to 8%
- Typical size of loan: $350,000 and higher
- Typical loan-to-value (LTV) ratio required: 85% to 90%
- Typical loan term: 25 years
- How easy to qualify: Moderate
The Small Business Administration’s (SBA’s) 7(a) loan program is its most popular loan program. It’s quicker and easier to obtain a 7(a) loan than other types of SBA loans.
Rates on SBA loans tend to be lower than online lenders’ rates and traditional bank rates because of the SBA guarantee. You can get financing of up to $5 million for up to 25 years. One other advantage over a traditional bank loan is being able to have an LTV ratio of up to 90%, reducing the down payment required.
There’s a prepayment penalty for loans with a term greater than 15 years if you prepay more than 25% of your loan in the first three years. The fee is charged against the amount you prepaid and is 5% for prepayments in year one, 3% in year two, and 1% in year three.
Live Oak Bank is the top provider nationally of SBA 7(a) loans. Check out Live Oak Bank’s website for more information.
SBA 504 Loan
- Average rates: 2.372% to 2.912% on CDC portion—4% to 10% on lender portion
- Typical size of loan: $1 million and higher
- Typical LTV ratio required: 85% to 90%
- Typical loan term: 20 years
- How easy to qualify: Difficult
An SBA 504 loan is a combination loan. One comes from a lender and one from a nonprofit lender known as a CDC. Both loans are closed simultaneously. SBA 504 loans are good choices because they offer up to $14 million in financing for up to 25 years. Like SBA 7(a) loans, SBA 504 loans allow the borrower to go up to 90% loan to value, reducing the down payment compared to a traditional loan.
Our guide to SBA 504 loans goes through the requirements and qualifications needed for the loan. Important guidelines to remember before applying for an SBA 504 loan include:
- Property must be owner-occupied
- Jobs must be created
- Business must have a net worth of less than $15 million
Lendio is an excellent choice for SBA 504 loans. Lendio is a broker that can match you with an SBA 504 lender. Check out its website for more information.
Conventional Bank Loan
- Average rates: 5% to 7%
- Typical size of loan: $250,000 and higher
- Typical LTV ratio required: 75% to 80%
- Typical loan term: Five to 10 years with a balloon
- How easy to qualify: Difficult
Banks make the majority of commercial real estate loans. They tend to work with borrowers with strong credit profiles looking for financing on small to medium-sized projects. Most banks require a credit score of 660 or above.
Interest rates offered by banks are competitive with SBA loans. Most borrowers are approved for variable-rate loans, where the rate resets every one to five years. With shorter terms than SBA loans and a higher required down payment, the initial costs of a commercial bank loan will be higher than an SBA loan.
The property doesn’t have to be owner-occupied, which opens up a wider range of properties to finance.
For commercial real estate borrowers looking for a conventional bank mortgage loan, Wells Fargo is an excellent choice. Wells Fargo provides funding of up to $1 million for five and 10 years, although it can go up to 20 years for larger projects. Visit Wells Fargo’s website for more information.
Another type of loan available from a conventional lender is a commercial bridge loan. Commercial bridge loans provide short-term financing for the purchase of commercial real estate and additional funds for the rehabilitation of a property. AVANA Capital is a direct lender that provides commercial bridge loans. Loans through AVANA range between $3 million and $25 million. Check out AVANA Capital’s website for further details.
Hard Money Loan
- Average rates: Starting at 4.75%
- Typical size of loan: $50,000 and higher
- Typical LTV ratio required: Up to 75%
- Typical loan term: Six months to three years
- How easy to qualify: Moderate
A hard money loan is mortgage financing for businesses that cannot get funding from other traditional lenders, either due to credit issues or properties in disrepair. These loans are considered a last resort in mortgage financing due to higher interest rates and fees. Traditional lenders usually have better rates for longer terms while hard money lenders offer more rapid funding times.
Hard money loans can be used for many types of commercial real estate, including mixed-use loans and self-storage financing.
LendingHome (now Kiavi) is our overall choice for best hard money loans. With fast funding times, no hidden fees in its closing costs, and no personal income qualifier, Kiavi is an excellent choice.
Online Marketplace Loan
- Average rates: 8% to 12%
- Typical size of loan: $25,000 and higher
- Typical LTV ratio required: Up to 80%
- Typical loan term: Six months to five years
- How easy to qualify: Moderate
Online marketplaces are newer sources of financing that match borrowers looking to purchase commercial real estate and investors willing to fund them for a return. These are sometimes called “soft-money lenders” because they charge more than banks but less than some hard money lenders. Interest rates range between 8% and 12%.
An example of this type of lender is RealtyMogul. Check out their website for more information.
How Commercial Real Estate Loan Rates Work
A commercial real estate loan is a mortgage loan used to purchase, renovate, or refinance commercial properties. Because the collateral on these loans is high-value, slowly depreciating real estate, lenders’ rates tend to be lower than on other commercial loans. Four factors determine commercial real estate loan rates:
- The creditworthiness of the borrower and the business: Borrowers and businesses with high credit scores will get better rates and terms than subprime borrowers.
- Type of commercial real estate loan obtained: As mentioned earlier in this article, each type of CRE loan has slightly different rates and terms.
- The size and term of the loan: Generally, the larger the loan and the longer the term, the higher the interest rate. This is because the more borrowed for a longer period of time, the higher the risk to the borrower. Hard money lenders are the exception to this rule because they work with lower-credit borrowers who carry a built-in higher risk.
- Prevailing market rates: Like residential mortgage rates, commercial real estate loan rates fluctuate with the changing market based on economic conditions.
Lenders provide either fixed or variable interest rates for commercial real estate loans. Fixed-rate loans don’t change over the life of the loan, meaning payments will remain the same until the loan is satisfied.
With variable-rate loans, your payment could increase or decrease as rates go up or down during the life of the loan. Rates change based on market rates. The most commonly used indicator of market rates is the prime rate. As of January 2022, the prime rate is 3.25%. Banks generally have rates of prime plus 1.5% to prime plus 3.5% (which would equal 4.75% to 6.75%) on commercial real estate loans.
Use a commercial loan calculator to figure out the total costs of a commercial real estate loan. In addition, see our guide on how to get a small business loan for general information.
It may also be in your best interest to consider a commercial real estate lease instead of a loan. Check out our guide comparing buying and leasing commercial real estate for more information.
How Much Do Commercial Real Estate Loan Rates Change Over Time?
While short-term, variable-rate loans won’t see much change in interest rate over the loan term, there can be significant fluctuations in 20- to 30-year mortgage loans. The following chart, provided by the St. Louis Fed’s Federal Reserve Economic Data (FRED) website, shows the changes in the prime rate since 1970.
![Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate [DPRIME]](https://fitsmallbusiness.com/wp-content/uploads/2021/11/Screenshot_changes_in_the_prime_rate_since_1970.png)
Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate [DPRIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DPRIME, December 21, 2021.
Bottom Line
Commercial real estate loan interest rates can vary depending on several factors: the type of loan you choose, the length of time and amount of money borrowed, the strength of the credit profile of the business and borrower, and market conditions that can cause rates to fluctuate. Consider which type of loan best fits your needs and compare different lenders to get the best available rates.
