The sale and lease of commercial real estate continues to grow, both regionally and nationally, but commercial Realtors remain concerned about the availability of commercial financing.
Overall, national lending for commercial real estate investment was incredibly strong in Q4 2015. In fact, the time period was the fourth highest quarter for borrowing and lending on record, according to CCIM. Major banks, life insurance companies, Freddie Mac, and Fannie Mae saw their highest originations volumes on record. But those loans were largely restricted to major cities, and are likely to stay there.
Smaller metro and rural areas are becoming more and more dependent on regional and local lenders to drive commercial real estate investment. This makes it difficult for investors in small-town city centers because the lack of competition from large lenders, especially when paired with slower lending as a result of new financial regulations, means that smaller markets like ours have a higher cost of capital.
“The big guys have access to big money, while those specializing in smaller transactions do not have access to those sources,” said National Association of Realtors® Chief Economist Lawrence Yun. “The largest banks can handle the compliance and higher capital requirements, but the smaller banks have less resources to meet these new regulations.”
In response, Yun has called for a relaxing of regulation on small financial institutions. “Smaller sized banks do not cause systemic risk; if a small bank goes under, it will not affect the entire market. They, and the businesses that depend on them, need regulatory relief,” he said. How those conversations will play out, however, remains to be seen.
Locally, NAI Beverly-Hanks Realtor Susanne Woosley, CCIM, CPM prefers to focus on the advantages of local lending. “Local banks and other lenders bring local knowledge, flexible terms, and a commitment to the growth of our region,” Woosley said. “They are more comfortable than the big lenders with the higher loan per square foot rates of property owners seeking higher leverage and loan-to-values. Unfortunately, commercial investors have to deal with shorter terms and slightly higher rates that go along with that.”
Commercial investors can also turn to the Small Business Administration, suggested Woosley. “The SBA is a valuable resource for owner-user financing. Their terms are closer to 20-25 years, much longer than the 10 years you often see for commercial investments.” That means that commercial investors, who already see much higher down payments than residential investors, can spread their payments out over a longer term.
Woosley also recommends locals look for alternative lenders, depending on their location and business. For instance, since Henderson County is designated as an agricultural zone, the Department of Agriculture can also be a source for commercial investment loans.
When you’re considering a commercial real estate purchase, it’s important to find the best lender. If you’re not sure where to start, the expert commercial brokers at NAI Beverly-Hanks Commercial are here to help. Contact us to advance your local and regional business endeavors.