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They're the rate at which banks can borrow money, so when a bank lends you money, they charge you that, plus some premium over that so that they don't lose money.
So what’s the different between libor and sofr? How does this impact real estate investors or debt investors in real estate?
I don't get into the technical differences much at my job, but my understanding is that the LIBOR (London Interbank Offered Rate) was the average rate at which banks borrowed from each other and is published daily by the ICE (Intercontinental Exchange). SOFR is the average rate that US banks borrow from investors overnight (to meet liquidity requirements) with US treasury bonds as collateral. There are a bunch of technical differences based on how their calculated, etc. but I don't deal enough with these nuances enough to comment.
In terms of how it affects real estate. There will be some short term volatility on interest rate swaps/options because a lot of these are switching from LIBOR to SOFR, but over the long term I don't think it changes much. The only thing that will really change is that debt quotes will start being based on SOFR vs. LIBOR and will likely get you to close to the same all-in rate.
Anecdotally the debt quotes we've received recently have all been based on LIBOR and don't really have any indication that LIBOR will end (though there's always a provision in our docs that if LIBOR goes away, and it will, that the replacement will be SOFR).
USD based 30-90 day LIBOR is being completely phased out by mid 2023 and the Fed has guidance that banks should stop writing LIBOR contracts by the end of the year.
There you go.
I think the most important thing to take away is that the reason there has been such a big push to go from Libor -> Sofr is because Sofr is measured in a liquid market whereas libor is determined by a survey of what banks THINK they could borrow at.
All this to say that Libor is not as reliable/transparent as something like Sofr which is based on observable trades in the repo market. Which is huge.
There’s other considerations such as liquidity and whatnot but basically that is why you’ve seen so much about it. The fact that Libor is based on estimates makes it prone to manipulation, among other things.
Not an exhaustive explanation by any means but I think just the big picture.
I think the most important thing to take away is that the reason there has been such a big push to go from Libor -> Sofr is because Sofr is measured in a liquid market whereas libor is determined by a survey of what banks THINK they could borrow at.
All this to say that Libor is not as reliable/transparent as something like Sofr which is based on observable trades in the repo market. Which is huge.
There’s other considerations such as liquidity and whatnot but basically that is why you’ve seen so much about it. The fact that Libor is based on estimates makes it prone to manipulation, among other things.
Not an exhaustive explanation by any means but I think just the big picture.
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