SOFR, the Secured Overnight Financing Rate, is the benchmark interest rate that underlies most floating-rate commercial real estate loans. It measures the cost of borrowing cash overnight against U.S. Treasury collateral in the repo market. A floating loan rate equals SOFR plus a lender spread, so SOFR sets the base a borrower's payment moves against.
How Does SOFR Work?
SOFR works as the index leg of a floating-rate loan: the interest rate equals SOFR plus a fixed spread, and the payment resets as SOFR moves. The New York Federal Reserve publishes SOFR every U.S. business day as a volume-weighted median of overnight Treasury repo transactions. Per the New York Fed, SOFR was 3.66% as of July 1, 2026.
Most commercial loans do not use overnight SOFR directly. They reference either Term SOFR, a forward-looking rate for 1, 3, 6, or 12 months published by CME Group, or a SOFR Average, a compounded backward-looking average over a rolling 30, 90, or 180 calendar days published by the New York Fed. The lender adds a spread, called the margin, to whichever version the loan documents specify.
SOFR form | What it measures | Common use |
Overnight SOFR | Yesterday's repo cost, one day | Base for all other forms |
Term SOFR | Forward-looking rate for a set term | Most CRE floating loans |
30-day SOFR Average | Compounded average of prior 30 days | Agency and some bridge loans |
Why SOFR Matters
SOFR matters because it is the single number that moves a floating-rate borrower's debt service, and it replaced LIBOR as the U.S. benchmark. Per commercialrealestate.loans, the spread lenders add over a SOFR index in commercial real estate typically ranges from 1.5% to 4%, so on the same index a strong sponsor and a weak one can pay rates that differ by more than 200 basis points.
Because the loan rate resets with SOFR, a borrower's coverage ratio is only as stable as SOFR is. The quotable point for an operator: a floating-rate loan does not have an interest rate, it has an index plus a spread, and only the spread is fixed. That is why floating-rate borrowers buy rate caps and why underwriting must stress the index, not just today's payment.
Example
A borrower holds a $10,000,000 floating-rate bridge loan priced at Term SOFR plus a 3.00% spread. The table shows the all-in rate and annual interest at two SOFR levels, using the July 1, 2026 SOFR of 3.66% and a stressed level of 5.00%.
Item | At current SOFR | At stressed SOFR |
SOFR index | 3.66% | 5.00% |
Lender spread | 3.00% | 3.00% |
All-in rate | 6.66% | 8.00% |
Annual interest on $10,000,000 | $666,000 | $800,000 |
At the current SOFR of 3.66%, the all-in rate is 6.66% and annual interest is $666,000. If SOFR rises to 5.00%, the all-in rate becomes 8.00% and annual interest rises to $800,000, an increase of $134,000 a year on the same balance. The spread never changed; the index did.
Variations and Edge Cases
SOFR is not one number, and the version a loan references changes how the payment behaves. The table below covers the distinctions an operator should confirm on a term sheet before signing.
Variant | Treatment |
Term SOFR | Set at the start of each period; the borrower knows the payment in advance |
SOFR in arrears | Compounded over the period; the final rate is known only at period end |
SOFR floor | A contractual minimum on the index, so the rate cannot fall below a set level even if SOFR does |
Credit spread adjustment | A small add-on used on loans converted from LIBOR to align the two indices |
The most common mistake is treating SOFR and LIBOR as interchangeable. Per the New York Fed, USD LIBOR ceased on June 30, 2023, and SOFR is the recommended replacement, but SOFR is a secured overnight rate while LIBOR was an unsecured term rate, so a like-for-like spread does not produce a like-for-like payment.
SOFR vs LIBOR
SOFR is often confused with LIBOR, and both serve as loan benchmarks, but they are built differently. SOFR is the Secured Overnight Financing Rate, based on actual overnight Treasury repo transactions. LIBOR was the London Interbank Offered Rate, based on banks' estimates of unsecured borrowing costs across multiple terms.
The practical difference is reliability and structure. SOFR is grounded in roughly a trillion dollars of daily transactions and is nearly impossible to manipulate, which is why the ARRC recommended it in June 2017. LIBOR relied on survey estimates and was discontinued for USD after June 30, 2023. Because SOFR is secured and LIBOR was unsecured, SOFR usually prints lower, so lenders reprice spreads when converting a loan.
Frequently Asked Questions
What is SOFR in commercial real estate?SOFR in commercial real estate is the benchmark interest rate that most floating-rate loans use as their index. The loan rate equals SOFR plus a lender spread, so SOFR sets the base a borrower's payment moves against. Per the New York Fed, SOFR was 3.66% as of July 1, 2026.
What is the difference between SOFR and Term SOFR?Overnight SOFR is a single day's Treasury repo cost published by the New York Fed. Term SOFR, published by CME Group, is a forward-looking rate for 1, 3, 6, or 12 months. Most commercial real estate floating loans reference Term SOFR because it sets the payment in advance for the full period.
How does SOFR affect a floating-rate loan payment?SOFR affects a floating-rate loan payment because the rate equals SOFR plus a fixed spread and resets as SOFR moves. On a $10,000,000 loan at SOFR plus 3.00%, a rise in SOFR from 3.66% to 5.00% raises annual interest from $666,000 to $800,000, a $134,000 increase on the same balance.
Why did SOFR replace LIBOR?SOFR replaced LIBOR because LIBOR relied on banks' survey estimates and proved open to manipulation, while SOFR is based on actual overnight Treasury repo transactions. The ARRC recommended SOFR in June 2017, and USD LIBOR ceased on June 30, 2023, per the New York Fed.
Related Terms
Interest Rate Cap
Bridge Loan
CMBS Loan
Debt Service Coverage Ratio
Permanent Loan